Underground Construction Contract Practices Guide

Recommended Contract Practices for Underground Construction Second Edition Edited by Sarah H. Wilson Society for Mining, Metallurgy & Exploration (SME), Inc. 12999 E. Adam Aircraft Circle Englewood, Colorado, USA 80112 (303) 948‑4200 / (800) 763‑3132 www.smenet.org The Society for Mining, Metallurgy & Exploration (SME) is a professional society whose more than 15,000 members represent professionals serving the minerals industry in more than 100 countries. SME members include engineers, geologists, metallurgists, educators, students, and researchers. SME advances the world‑ wide mining and underground construction community through information exchange and professional development. Information contained in this work has been obtained by SME from sources believed to be reliable. However, neither SME nor its authors and editors guarantee the accuracy or completeness of any information published herein, and neither SME nor its authors and editors shall be responsible for any errors, omissions, or damages arising out of use of this information. This work is published with the understanding that SME and its authors and editors are supplying information but are not attempting to render engineering or other professional services. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. If such services are required, the assistance of an appropriate professional should be sought. Any statement or views presented here are those of the authors and are not necessarily those of SME. The mention of trade names for commercial products does not imply the approval or endorsement of SME. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. ISBN 978‑0‑87335-459-2 eBook 978‑0‑87335-460-8 Copyright © 2019 Society for Mining, Metallurgy & Exploration All Rights Reserved. Printed in the United States of America. Cover image courtesy of McMillen Jacobs Associates. Photographer Susan Bednarz Title page image courtesy of the San Francisco Public Utilities Commission. Photographer Robin Scheswohl Library of Congress Cataloging-in-Publication Data Names: Wilson, Sarah H., editor. | Society for Mining, Metallurgy, and Exploration (U.S.), publisher, sponsoring body. Title: Recommended contract practices for underground construction / edited by Sarah H. Wilson. Description: Second edition. | Englewood, Colorado : Society for Mining, Metallurgy & Exploration, Inc., 2019. | Includes bibliographical references and index. Identifiers: LCCN 2019013294 (print) | LCCN 2019013554 (ebook) | ISBN 9780873354608 | ISBN 9780873354592 (pbk.) | ISBN 9780873354608 (Ebook) Subjects: LCSH: Underground construction contracts--United States. Classification: LCC KF902 (ebook) | LCC KF902 .R43 2019 (print) | DDC 343.7307/862419--dc23 LC record available at https://lccn.loc.gov/2019013294 Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Contents PREF ACE TO TH E SECOND EDIT ION �� vii ACK NOW L ED GM ENTS �� ix C H A P TE R 1 REL ATI ONSH I PS �� 1 Introduction �� 1 The Stakeholders � � �� 2 The Contract�� 3 Improving Relationships �� 4 Conclusions and Recommendations �� 6 C H A P TE R 2 PROJECT PL ANNI NG � � � � � �� 9 Introduction �� 9 Roles and Responsibilities in Planning� � �� 1 0 Needs Assessment� � � � � � �� 1 0 Feasibility Study� � �� 1 1 Alternatives and Environmental Analysis�� 1 2 Regulatory Approvals, Permits, Easements, and Property Acquisitions� �� 1 4 Conceptual Design�� 1 7 Establishing the Implementation Plan�� 1 7 Conclusions and Recommendations �� 2 0 References�� 2 1 C H A P TE R 3 SU BSU RF ACE COND I TI ONS � � �� 2 3 Introduction �� 2 3 Importance of Comprehensive Subsurface Investigations�� 2 4 Implementation of a Subsurface Investigation Program�� 2 7 Use of Geotechnical Reports as Contract Documents �� 3 1 Conclusions and Recommendations �� 3 5 References�� 3 6 C H A P TE R 4 RI SK M ANAGEM ENT � � �� 3 9 Introduction �� 3 9 Understanding Risk �� 4 0 Image courtesy of WISKO America Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. iv Contents Risk Management Is a Process � � �� 4 1 Use of the Risk Register in Procurement � � � � �� 5 1 Responsibilities of the Parties for Risk Management � � �� 5 4 Insurance Codes of Practice� � � � �� 5 4 Conclusions and Recommendations �� 5 6 References�� 5 7 CH A P TE R 5 D ESI GN � � � � � � �� 5 9 Introduction �� 5 9 Delivery Methods� � � � � � � � � � �� 5 9 Initial Design�� 6 0 Design Development �� 6 1 Design Documents�� 6 5 Design Review�� 6 7 Construction Support� � � � � � � � �� 7 0 Testing and Commissioning/Operations and Maintenance �� 7 2 Value Engineering Change Proposals � � �� 7 3 Conclusions and Recommendations �� 7 3 References�� 7 5 CH A P TE R 6 CONSTRU CTI ON M ANAGEMENT �� 7 7 Introduction �� 7 7 Need for a Specialized Construction Manager �� 7 7 Selecting a Construction Manager � � �� 7 8 Scope of Work�� 8 1 Conclusions and Recommendations �� 8 4 References�� 8 5 CH A P TE R 7 COST ESTI M ATES � � � � � � � � � � � � �� 8 7 Introduction �� 8 7 Cost Estimate Applications �� 8 8 Preparing Cost Estimates�� 9 0 Factors Affecting the Cost of Underground Construction � � � � �� 9 2 Establishing the Contract Time of Performance� �� 9 3 Contingencies �� 9 4 Conclusions and Recommendations �� 9 6 References�� 9 7 CH A P TE R 8 SCH ED U L ES � � �� 9 9 Introduction �� 9 9 Realistic Schedule: Design/Construction/Testing/Completion�� 9 9 Schedule Preparation � � � � �� 1 0 0 Evolution of Underground Construction Scheduling Needs� �� 1 0 1 Schedule Models for Underground Projects�� 1 0 2 Interim Milestones: Substantial/Final Completion �� 1 0 5 Liquidated Damages� � � � � � � � �� 1 0 6 Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Contents v Scheduling Constraints �� 1 0 7 Scheduling Specifications� � �� 1 0 8 Cost- and Resource-Loaded Schedules� �� 1 1 0 Approval or Acceptance of a Contractor’s Schedule� �� 1 1 1 Subcontractor Scheduling Problems �� 1 1 2 Short-Term and Partial Schedules� �� 1 1 2 Forensic Scheduling �� 1 1 2 Monte Carlo Simulations �� 1 1 3 Conclusions and Recommendations �� 1 1 3 References�� 1 1 4 C H A P TE R 9 PRI CI NG AND PAYM ENT P R OVISIONS � � � � �� 1 1 5 Introduction �� 1 1 5 Philosophy of Contract Pricing Provisions� �� 1 1 5 Firm Fixed Price Contracts �� 1 1 6 Problematic Payment Issues� � �� 1 1 7 A+B Bidding �� 1 2 5 Payment for Design Costs: Design-Build Projects�� 1 2 6 Conclusions and Recommendations �� 1 2 7 Reference� � � � � � � � � � � � �� 1 2 8 C H A P TE R 1 0 CONTRACTS �� 1 2 9 Introduction �� 1 2 9 Contract Law and Underground Construction� �� 1 3 0 Factors That Shape Underground Construction Contracting�� 1 3 1 Procurement Options: Delivery Methods � � �� 1 3 2 Selection of Delivery Method� �� 1 3 6 Procurement Options: Pricing Methods � � � � �� 1 3 6 Procurement of Professional Services� �� 1 3 9 Owner’s Option to Pre-Purchase � � � � �� 1 4 0 Contract Documents �� 1 4 1 Construction Contractor Qualifications � � � � �� 1 4 3 Conclusions and Recommendations �� 1 4 5 References�� 1 4 6 C H A P TE R 1 1 CH ANGES �� 1 4 7 Introduction �� 1 4 7 Change Avoidance �� 1 4 8 Notice� � �� 1 4 9 Determining Merit�� 1 5 1 Differing Site Conditions �� 1 5 1 Force Majeure �� 1 5 2 Pricing Methodology �� 1 5 3 Elements of Cost � � �� 1 5 5 Extended Overhead �� 1 5 7 Overhead and Profit� � � � � � � � � � � � � �� 1 5 8 Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. vi Contents Performance Bond �� 1 5 9 Bidding to Finish Early�� 1 6 0 Conclusions and Recommendations �� 1 6 0 References�� 1 6 1 CH A P TE R 1 2 D I SPU TE RESOL U TI ON �� 1 6 3 Introduction �� 1 6 3 Dispute Management and Avoidance Tools� �� 1 6 4 Dispute Resolution Methods �� 1 6 7 Conclusions and Recommendations �� 1 7 7 References�� 1 7 8 CH A P TE R 1 3 I NSU RANCE � � � � �� 1 7 9 Introduction �� 1 7 9 Overview of Insurance Concepts and Relationships Involved�� 1 7 9 Insurance and Surety Products for Underground Construction �� 1 8 1 Relationship Between Contractual Responsibilities and Insurance� �� 1 8 8 Insurance for Joint Ventures �� 1 9 1 Unique Insurance Considerations for Alternative Delivery�� 1 9 2 Use of Consolidated Insurance Programs�� 1 9 4 Conclusions and Recommendations �� 1 9 6 CH A P TE R 1 4 SU M M ARY OF RECOM M ENDA T IONS � �� 1 9 9 Introduction �� 1 9 9 Relationships�� 1 9 9 Project Planning�� 2 0 0 Subsurface Conditions �� 2 0 0 Risk Management� � � � � � �� 2 0 1 Design �� 2 0 2 Construction Management �� 2 0 3 Cost Estimates� � � � � � �� 2 0 3 Schedules� � � � � � � � � � �� 2 0 4 Pricing and Payment Provisions �� 2 0 4 Contracts� � � � � � � � � � �� 2 0 5 Changes � � �� 2 0 6 Dispute Resolution� � � � �� 2 0 7 Insurance� � �� 2 0 7 AD D I TI ONAL READ I NG �� 2 0 9 I ND EX �� 2 1 3 Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Preface to the Second Edition A successful underground project is one where relationships are strong, the objectives as understood by each party are met or exceeded, and the work product serves its stakeholders and is maintainable in a way that fits with the project vision. High-level metrics for project success relate to safety, quality, schedule, and budget. In 2008, the Underground Construction Association of the Society for Mining, Metallurgy & Exploration (UCA of SME) published the first edition of this book to provide guidance for contracts from conception through construction. Its aim was to recommend improvements to underground contracting practices during all project stages. It also presented roles and responsibilities for project participants to promote better contracts— and thus better projects. That first edition became a resource for the underground industry. Intended to serve as a concise source of guidance for drafting and implementation of contract provisions, it is recognizable as just that by an ever-increasing number of industry members. Although not intended as a how-to manual of practice for the various topics, it points out issues that are specific to the underground industry and that drafters of contract language must under‑ stand to prepare documents that can result in successful projects. This second edition was undertaken by the UCA of SME because the underground industry has undergone numerous changes over the last decade. Changes in tunneling tech‑ nology, more common use of design-build as a contracting mechanism, and many lessons learned have sparked some creative contract approaches. Still, there are too many proj‑ ects that are not as successful as they could be. Project managers new to the industry— perhaps representing an entity debuting its first underground project—make assumptions about roles, responsibilities, and even what constitutes a successful project. This can lead to misaligned goals, inefficient problem solving, and ultimately unresolved disputes. A better understanding of the specialized nature of the underground industry with respect to the topics covered in this book and certain contracting approaches can usher in success for all project participants. This edition provides an opportunity to discuss updated recommenda‑ tions based on lessons learned over the past 10 to 15 years. A better understanding of the specialized nature of the underground industry with respect to the topics covered in this book and certain contracting approaches can usher in success for all project participants. Image from Shu-Hung Liu/Shutterstock Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. vii viii Preface to the Second Edition The editor of this book received guidance and input from a diverse group of profes‑ sionals. We convened at industry conferences to update the first edition, discuss new chapters for state-of-practice approaches to project elements, and collaborate on recom‑ mendations. Recommendations in the first edition have been modified to address different practices in the art of underground construction and the lessons learned over the past 10 years. Throughout the book, topics are addressed that highlight underground practices. The guidance provided herein is based on a significant amount of collective experience and is aimed at getting and keeping everyone on the same page with the contracting approach and roles/responsibilities described throughout this document. Although representatives from all reaches of the industry participated, it is worth noting that women contributors played a significantly larger role in this second edition; the UCA of SME clearly recognizes there is a growing number of women practitioners and leaders in underground construction. The names of some of these leaders appear in the Acknowledgments as oversight committee member, chapter authors, workshop partici‑ pants, and even as inspiration for the second edition. Included are chapters on relationships, project planning, subsurface conditions, risk management, design, construction management (now its own chapter), cost estimates, schedules, pricing and payment provisions, contracts, changes, dispute resolution, and a new chapter on insurance. Recommendations for each of these topics can be found at the end of each chapter and are also compiled in Chapter 14, “Summary of Recommendations.” The recommendations contained in this edition are intended to guide owners and their engineers in developing and administering contracts, and to give contractors a better under‑ standing of the rationale behind contract provisions. Our goal is that more underground projects in this country can be best projects, where improved relationships and fair contracts enable all project participants to personally invest in cost-effective, profitable projects, ensuring the continued health of the underground industry. The best projects are the ones with the good stories, and the ones that team members look forward to building and to working on every day. Our goal is that more underground projects in this country can be best projects, where improved relationships and fair contracts enable all project participants to personally invest in cost-effective, profitable projects, ensuring the continued health of the underground industry. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Acknowledgments This study of contracting practices was updated by the editor under the direction of an over‑ sight committee sponsored by the Underground Construction Association of the Society for Mining, Metallurgy & Exploration (UCA of SME). The oversight committee members represent stakeholders that have major roles in underground construction: design engineer, owner, contractor, and supplier. The committee includes ■■ Robert Goodfellow, Aldea Services Inc. ■■ Leon “Lonnie” Jacobs, Frontier-Kemper Constructors, Inc. ■■ Pamela Moran, Schneider Moran, Inc. ■■ Matt Preedy, Sound Transit Primary chapter authors of this edition are ■■ Brian Cooper, Gallagher ■■ William W. Edgerton, McMillen Jacobs Associates ■■ Amanda Elioff, WSP Global, Inc. ■■ Brian Fulcher, McMillen Jacobs Associates ■■ Joseph Gildner, Sound Transit ■■ Brian Hammel, Gallagher ■■ Matt Koziol, Schnabel Engineering ■■ Karen Kubick, San Francisco Public Utilities Commission (retired) ■■ Patricia Parker, San Francisco Municipal Transportation Agency ■■ Michael F. Roach, Traylor Bros., Inc. ■■ Scott Shylanski, EPC Consultants, Inc. ■■ George Teetes, Schnabel Engineering ■■ Sarah Wilson, McMillen Jacobs Associates ■■ Dave Young, Mott MacDonald LLC The following members of the industry provided extensive review of manuscript drafts, commenting on the topics covered and the recommendations made herein: ■■ Chris Bennett, AECOM ■■ Mike Bruen, Stantec, Inc. ■■ Ben Campbell, Barnard Construction Company, Inc. ■■ Greg Colzani, Jacobs Engineering Group, Inc. ■■ Gregg Davidson, McMillen Jacobs Associates ■■ Anthony Gallo, Schiavone Construction Co. LLC ■■ William Hansmire, WSP Global, Inc. ■■ Alan Howard, Brierley Associates Image courtesy of Traylor Bros. Inc. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. ix Acknowledgments x ■■ Alan Johanson, San Francisco Public Utilities Commission ■■ Steve Klein, WSP Global, Inc. ■■ Michael Lehnen, Mott MacDonald LLC ■■ Justin Lianides, Mott MacDonald LLC ■■ Alfred Moergeli, Moergeli+Moergeli ■■ Erika Moonin, Southern Nevada Water District ■■ Chuck Morganson, HNTB Corporation ■■ Zach Munoz, Los Angeles County Metropolitan Transportation Authority ■■ Guido Perez, MST Global ■■ Anthony Pooley, Jacobs Engineering Group, Inc. ■■ Mark Ramsey, HNTB Corporation ■■ Rich Redmond, AECOM ■■ Dave Rogstad, Frontier-Kemper Constructors, Inc. ■■ Bob Rubin, Bob Rubin Construction Disputes Avoidance and Resolution ■■ Art Silber, Mott MacDonald LLC ■■ Tim Smirnoff, HDR (retired) ■■ Michael Torsiello, WSP Global, Inc. ■■ Rick Vincent, Northeast Ohio Regional Sewer District ■■ Adam Wirthlin, Wirthlin Consulting Group ■■ James Wonneberg, McMillen Jacobs Associates ■■ Brian Zelenko, WSP Global, Inc. ■■ Derek Zoldy, Hatch, Ltd. In addition, a workshop was held at the North American Tunneling Conference in Washington, D.C. At this workshop, the following participants discussed the various chap‑ ters and proposed recommendations: ■■ Jim Brady ■■ Matthew Crow ■■ Gregg Davidson ■■ Daniel Dobbels ■■ Amanda Elioff ■■ Chris Feeney ■■ Brian Fulcher ■■ Anthony Gallo ■■ Giuseppe Gaspari ■■ Brian Hammel ■■ William Hansmire ■■ James Hartzel ■■ David Henley ■■ Alan Howard ■■ Milind Joshi ■■ David Jurich ■■ Alfred Moergeli ■■ David Mullen ■■ Brad Murray ■■ Mark Ramsey ■■ Mike Roach ■■ Bob Rubin ■■ Mina Shinouda ■■ Rajul Teredesai ■■ Fulvio Tonon ■■ Michael Torsiello ■■ Patrizio Torta ■■ Rick Vincent ■■ Wayne Warburton ■■ Brian Zelenko ■■ Derek Zoldy Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Acknowledgments xi The editor is grateful to these individuals and others who made comments during the plan‑ ning, writing, and editing of this book. Thanks go to Brenda Bohlke for the inspiration to produce this second edition. Special thanks also go to Julie McCullough for her excellent technical editing and to Seth McGinnis for his inspired graphic design. Lisa Rode and Amanda Elioff provided insightful consistency review on a very short turnaround. And the SME book publishing group, led by Jane Olivier, provided insightful guidance and a final product of the highest quality. Finally, it is important to recognize the work of the authors of the first edition, which was the foundation for this second edition: ■■ Christopher Bennett ■■ David H. Corkum ■■ William W. Edgerton ■■ Michelle D. Ginder ■■ Howard Handewith ■■ David Hatem ■■ Tom Peyton ■■ Ed Plotkin ■■ Robert A. Pond ■■ John Reilly ■■ Robert (Red) Robinson ■■ Bob Rubin ■■ W.D. (Toby) Wightman 2 William Edgerton, editor of the first edition, served as experienced and trusted adviser and listener through every step of the process, from inception to final proofing. He could not have been more generous with his time and insights. Without him, this book would not exist. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 1 Relationships I N TR O D U C TION On underground projects, where even seemingly small problems can result in major cost and schedule impacts because of the typically linear nature of construction, the relationships among the project participants are major determiners of whether the project is accomplished successfully and with few disputes. Many projects that were technically very difficult, with lots of changes and “rainy days,” have been accomplished with few disagreements and no disputes. There have also been many projects that were not as technically challenging but were contentious from the first hour and were eventually resolved in litigation. What makes some projects run smoothly and others travel the unpaved road? The difference seems to be in the relationships of the project principals: representatives of the design engineer, construction manager, owner agency, and contractor. It is not easy to develop positive relationships among these participants. Although they have a common goal of delivering a successful project, their definitions of success are slightly different, and they are pushed and pulled by different drivers and constraints. Yet, the project proponent must find a way to unify them around some common objectives and provide a framework in which they can build productive relationships. The primary vehicle for this is the contract. The contract sets the stage for how relationships are created and how they evolve throughout the project. If the contract sets the stage for an orchestra, where each member plays a different instrument in harmony, there is a good chance of success. If it instead sets the stage like a boxing ring, the project participants are likely to square off like adversaries in a prizefight. The personal and institutional relationships that form at the beginning of a project and evolve through all of its phases may be the most crucial, yet most fragile, part of the entire project delivery process. The coming together of disparate groups of people with different interests and different bosses (for the most part), but with a common objective, is necessary for successful project completion. The way these groups work together is a fundamental Image © Fulcher/Elioff Collections Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 1 Chapter 1 2 determinant in how successfully the many challenges on a major construction project are met. These interpersonal relationships, and in particular each party’s respect and appreciation for the objectives of the other parties, are the key factors in progressing the work and in whether disagreements develop into disputes and how they are resolved. This chapter discusses the various stakeholders in an underground construction contract, how their fortunes are tied to sometimes unforgiving contract language, and the importance of creating contracts that help establish successful working relationships among the stakeholders. T H E S TA K E H O LD ERS Most heavy civil construction is procured for governmental or quasi-governmental agencies, but it is the public that stands to gain the most from the project over time. As the ultimate beneficiaries of the project, members of the public are the ultimate risk takers with respect to project success or failure. However, they are not the only ones: ■■ Design engineer. Although the design engineering firm’s direct economic risks are usually modest, risks to its reputation are significant because the engineer’s future business depends on a selection process that is not based on price but on good press and good relationships with the owner. High-quality work, technical expertise, and responsiveness are components of these relationships. This relationship with the owner may differ to some extent for design-build (DB) contracts. ■■ Construction manager. The construction manager may be an extension of the owner’s staff, but in underground work, the job is more often handled by a separate consulting firm whose primary responsibility is to coordinate the resources of all the other parties to achieve the stated objectives and to keep roles and responsibilities clear. The construction manager plays a pivotal role in facilitating the relationships among all of the other stakeholders. It is important that the construction manager understands this role and does not simply act as an advocate for the owner and against the contractor. This is not always easy given the direct financial consulting relationship between the owner and the construction manager; however, a good construction manager is guided by the agreed-on overall objective of a successful project. ■■ Owner agency. In most underground construction projects, the public is represented by the owner agency. How well its employees perform on the project will hurt or help their careers, depending on how they are judged by their superiors as well as how the agency is judged by the public and media. The careers of the public’s representatives, the politicians, also depend on their constituents’ perceptions that the project was a success. ■■ Contractor. On publicly advertised projects where the winning contractor is selected on the basis of price, the contractor stands to benefit (i.e., profit) only from the contract in hand. While highly desirable, the good opinion of the owner or engineer at job completion weighs far less in obtaining the next job than being the low bidder. By contrast, in a private or quasi-public setting, where best value and invited bid procurements are the norm, the potential for future contracts makes winning and keeping the owner’s favor at least as important to the contractor as the financial result of any particular project. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Relationships 3 TH E C O N TR ACT Whether the contract for a construction project is written specifically for that project or is a standard that the owner has used for decades on various kinds of construction, it is likely to be offered to bidders on a take-it-or-leave-it basis with essentially no opportunity to negotiate terms. Some such contracts are reasonably equitable, meaning they allocate responsibility for each given aspect of the contract to the party that has most control of that aspect. Other contracts contain harsh, unfair, or inequitable terms. These are likely to yield fewer bidders, higher bids, constant contentiousness, and greater legal costs. Despite these drawbacks, they remain unchanged. Some of the most common reasons for this are as follows: ■■ Agency standards, municipal ordinances, state laws, and federal procurement laws often mandate some or all of the terms of a contract without respect for the unique requirements of particular types of construction, including underground construction. ■■ Changing standard contracts requires time, resources, and shared political will, which are in short supply at many public agencies. ■■ Creating more equitable contracts may require public officials and public servants to risk public criticism for being soft on high-profile contractors and big business. Owners with inequitable contract terms, such as denial of time extensions for directed work, are quick to observe that bidders are not forced to bid if they do not like the terms. And the owner has the right to assume that unfavorable terms are acceptable to the contractor as long as the contractor signs the contract. This viewpoint, however, ignores the market realities that apply to construction companies and, particularly, specialty contractors such as tunnelers. Not every bid is successful, and a contractor that bids only when all the contractual stars are aligned will have no work and, in short order, no revenue and no company. Therefore, rather than focusing on the difficulties that may be associated with creating more equitable contracts, owners should remember that holding the project principals to harsh and inequitable terms has many negative consequences. For example, allocating all the risk to the contractor is counterproductive, as it frequently leads to increased costs and delays to the owner through inflated bid prices, disputes, claims, and litigation (see Chapter 4). Other harsh contractual language makes project relationships less resilient when things go wrong. This is particularly risky on underground projects, because the typical underground project presents far more opportunities for things to go wrong than does the typical aboveground project: ■■ Unlike aboveground construction, very little underground construction can be concurrently done. A small problem underground can have huge cost and schedule impacts if it shuts down the heading or slows progress. ■■ Underground construction is highly uncertain. Even with extensive (and expensive) subsurface investigation, it is impossible to foresee every challenge that may be encountered underground. ■■ Most underground projects are true megaprojects, with massive budgets, long schedules, and many participants. Complexity adds risk. ■■ Underground construction carries a high velocity of cash flow and the potential for significant financial losses. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 1 4 In this pressurized and uncertain environment, it is critical for the parties to be working to an equitable contract that encourages productive problem-solving and discourages unhelpful contentious behavior and the blame game. It is critical for the parties to be working to an equitable contract that encourages productive problem-solving and discourages unhelpful contentious behavior and the blame game. That said, although the contract is prepared by the owner agency, not all contract problems can be laid at the owner’s doorstep. Many projects deteriorate because of parties that ignore explicit contract language or do not understand or respect their contractual roles and responsibilities, either usurping or ceding control. Frequent examples are contractors that insist on design changes and construction managers and designers that dictate means, methods, and construction work plans. These failures are to be avoided as much as the failure to establish an equitable contract in the first place. IM P R O V I N G R E LATI ONSH I PS Owners, construction managers, engineers, and contractors have been accustomed to traditional roles and specific methodologies that have existed for generations, but underground work has become more complex and contracts encompass many new social, performance, and technical requirements. Therefore, the underground industry must develop project methodologies that promote effective personal and institutional relationships and early resolution of differences. Three such methodologies have been used, with varying degrees of success: 1. Alliancing is one such relationship-based methodology and is a delivery method that uses the contract documents to create a nonadversarial relationship in which all the parties’ interests are aligned. Typical elements of alliance contracts are shared risks and rewards, monetary incentives for achieving certain objectives, and alternative governance structures. (This concept is discussed further in Chapter 10.) Although this methodology has been used with varying degrees of success in the petroleum industry, and for certain infrastructure projects, especially in Australia, it has not been widely accepted for use on publicly owned projects in the United States. 2. Another methodology that emphasizes the relationships between contract parties is partnering. For most underground projects, the long duration of the contract means that change is inevitable, and the single common thread in achieving a successful outcome is the ability for the parties involved to communicate with each other in a positive manner, recognizing each other’s specific concerns and objectives. This ability to communicate requires an in-depth understanding of human behavior and the dynamics of group decision-making, which are not topics typically covered in engineering schools. Indeed, to generalize, these are skills that engineers typically do not usually have in great supply. Nonetheless, for jobs of long duration, virtually all projects require such skills, because not everything that happens can be predicted in advance and accounted for with contract language (see also Chapter 12). The philosophical basis of partnering is that the underlying problem in many situations is the parties’ inability to communicate. In addressing this shortcoming, Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Relationships 5 the parties are asked to understand and accept the objectives of the other side and recognize that all parties want to do the right thing. Partnering has been adopted as a standard, noncontentious way to resolve issues before they get out of hand. The partnering process typically includes representatives of the owner, the construction manager, and the contractor, and is designed to begin right from the contract award and continue through the whole job. Recognizing that the parties all have a stake in the successful outcome of a project, the partnering process emphasizes the need for them to talk freely as equals, trusting that budding disputes can be worked out fairly and amicably. For a successful partnering outcome, the project owner must assume the leadership role in creating the ethical environment of good faith and fair dealing. Experience within the United States has demonstrated that most contractors will respond in a positive manner if such an attitude is initiated by the owner; however, when that attitude is not present, not even partnering can make a successful outcome. Because relationships on underground projects have often been adversarial, the parties cannot be expected to spontaneously begin partnering. They need someone to explain the process, guide them, and ride herd on the unbelievers and procrastinators. Thus was born the partnering facilitator, who is part teacher, part cheerleader, part psychologist, part evangelist, part enforcer, and part camp counselor. Some facilitators are honest, skilled, and effective, and some are not. Experienced facilitators are essential to the process, and the best way of finding a good facilitator is by seeking the recommendations of those who have used them on previous projects. Even when partnering is being used effectively, it does not resolve all of a project’s relationship problems, especially as the politically broadened definition of stakeholder brings a host of third parties to the table, including those with no real financial stake in the completed project. Some partnering theorists argue that the partnering sessions should include not only the primary contracting parties, but also adjacent property owners and representatives of governmental jurisdictions, funding entities, and permit agencies. In practice, the inclusion of these participants has not proven helpful in most cases, because partnering sessions need to focus on detailed problem-solving that is necessary for successful project completion but is typically not particularly relevant to third-party stakeholders. For certain DB projects that require third-party approval of final design, targeted partnering sessions have been successful. A successful partnering outcome requires senior executives of all parties to agree on their common expectations and to be committed to designing processes for achieving them. One of the processes that has been successfully implemented is the issue resolution/escalation ladder, where the focus is on resolving issues at the lowest possible level. Partnering failures have occurred when the best intentions of the project executives are not shared with the project staff, who are on the front line. All of the personnel who interact on a day-to-day basis with their counterparts must believe in the concepts of good faith and fair dealing that have been agreed to by the project executives. This includes project managers, superintendents, project and field engineers, inspectors, subcontractors, major suppliers, and safety representatives. It also includes new staff members who arrive after the initial partnering sessions. This makes the ongoing, usually quarterly, partnering update meetings a crucial element Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 6 Chapter 1 to the project’s continued success. The (positive) partnering attitudes expressed by the project executives must be understood by all project staff. Good leadership by the executives results in successful project outcomes. 3. A derivative of partnering, which may help in some cases, is the appointment of a project neutral, an individual whose task is to bring about an effective and swift solution to project problems as they occur. The project neutral must have the respect and confidence of the parties, initially and throughout the project, and should have experience with the kind of work being done. The project neutral spends a lot of time at the project site, attends all meetings of substance and, when an issue begins to fester, steps in to identify and resolve it. Although project neutrals have no formal authority and are neither arbitrator nor mediator, they serve as ombudspersons for all and advocates for none, deriving power only from mutual respect. In effect a shuttle diplomat, the neutral’s goal is to keep the construction work and the contract work moving at the same pace without unnecessarily creating a disadvantage to any party. The benefit of such an approach is that it facilitates communication among the parties, albeit through a third party. (The dispute resolution board, a type of project neutral, is discussed in Chapter 12.) The risk management process (see Chapter 4) can also be used to foster productive project relationships. In this process, the risk register and risk meetings and workshops are used as opportunities to begin and carry on difficult discussions about technical project issues without reference to commercial solutions. These conversations are focused on all parties working together to reduce the likelihood of occurrence and the impact of identified risks. This partnering exercise consists of a collaborative brainstorming exercise that promotes working relationships and camaraderie as well as a mutual respect between the parties that bears fruit throughout the project. Other contracting methods that encourage working relationships to reduce disputes include the Portland approach (see Chapter 10) and construction manager at risk/ construction manager–general contractor (CMAR/CMGC) (see Chapter 2). When the parties can understand each other’s issues and concerns before developing a position from which it is difficult to retreat, the project’s goals are more likely to be achieved. In some cases, the big problems are not really perpetuated by a poor appreciation of the other party’s concerns, but by genuine disagreements over large amounts of money—issues of “you bet your company and I bet my career” magnitude. Although small things are easy to be diplomatic about, large issues are more difficult to resolve. Nonetheless, when the parties can understand each other’s issues and concerns before developing a position from which it is difficult to retreat, the project’s goals are more likely to be achieved. CO N C LU S I O N S AND RECOM M END ATI ONS As you read the rest of this book, be mindful that, although contracts for construction of underground works may seem antiseptic and soulless engineering and legal transactions, they are in fact the manifestation of many human relationships—from recognition of the need for a facility to the cutting of the ribbon and banking of the last check. The industry’s Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Relationships 7 objective of establishing better contracting practices should be viewed as an attempt to ensure that underground projects have more in common with the symphony than the boxing ring, as noted at the beginning of this chapter. Achieving this requires equitable contracts that set the stage for productive interpersonal relationships in an environment where the individual people working on the contract are routinely being pushed and pulled in different directions within the highly pressurized environment of a complex project. ■■ Recommendation 1-1: The contract terms should align risk and financial responsibilities of the participants with the party that has control, and each party must embrace its own responsibilities. ■■ Recommendation 1-2: All underground projects should include partnering as a method to highlight the executives’ attitude of good faith and fair dealing, which is critical to the success of the project. The project executives must establish the ultimate project objectives, honestly communicate with each other about issues and concerns, lead by example, and ensure that their communication policies flow down to all the project participants. ■■ Recommendation 1-3: Owners should avoid inequitable terms in the contract language. Such harsh, unfair, or inequitable terms will likely yield fewer bidders, higher bids, constant contentiousness, and greater legal costs. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter12 Chapter Project Planning I N TR O D U C TION The goal of project planning for an underground project is to produce a high-quality project implementation plan for a facility that will meet agreed-on objectives in a cost-effective and timely manner. The planning process guides and enables decision-making about project feasibility, construction and delivery methods, schedule, and cost. It is also the phase at which some regulatory approvals are obtained and buy-in is sought from adjacent third parties. The outcomes of these activities can either advance or stop a project. To promote informed decisions, project planning should be sufficiently thorough and rigorous to allow accurate assessment of the need for the project and of the relative advantages and disadvantages of alternatives that will meet the owner’s objectives and required levels of service. Owners generally have existing planning processes that are thorough and proven, and can easily be adapted to underground projects. This chapter provides recommendations for using a typical planning process to define underground project parameters in ways that promote good contracting practices. It discusses key elements of project planning including the following: 1. Needs assessment 2. Feasibility study 3. Alternatives and environmental analysis 4. Regulatory approvals, permits, easements, and property acquisitions 5. Conceptual design 6. Establishing the implementation plan Although these elements can be viewed as discrete activities that are progressively more focused on a selected project approach, there is usually some overlap. For example, presenting the alternatives for environmental approvals may require a level of conceptual design of multiple alternatives. At the commencement of planning, the planning team must review its planning process and determine the optimal approach and resources to proceed smoothly through planning to the implementation plan that serves as the basis for preliminary design. Image courtesy of Traylor Brothers, Inc. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 9 Chapter 2 10 RO L E S A N D R E SPONSI BI L I TI ES I N PL ANN ING Underground projects are among the most multidisciplined in heavy civil construction and may draw on specialists in civil engineering, structural engineering, geotechnical engineering, mechanical and electrical engineering, ventilation, fire and life safety, environmental management, architecture, urban planning, traffic management, risk management, insurance, construction management, and construction; all in addition to project-specific specialists in such areas as trackwork and traction power (for a rail tunnel), water resources (for a water/wastewater tunnel), and highway engineering (for a roadway tunnel). If a project is part of a larger program, these interdependencies add complexity, and the project team will likely also include a program manager to help facilitate these interfaces. Most owner agencies do not have full-time employees who are subject matter experts in the preceding fields. As such, during project planning, the owner will need to prepare a resource plan for the project to ensure that specialty professional services, which may be in high demand, are secured at the right phase of the project. For any project where an underground alternative is being considered, the owner should engage people who are experienced in underground construction. Some owners contract for all the underground professional services and make the consultants completely responsible for the resulting outcome. Other agencies are able to provide some of the technical specialties in-house, and they establish an integrated project team that includes both their own employees and consultants. The planning team will generally include the owner’s representatives (in-house or consultants) in relevant technical disciplines and in risk management, insurance, and procurement. The owner’s operational and maintenance staff should participate to ensure that the necessary criteria are included and the conceptual engineering in particular considers ongoing operational requirements. The owner will likely need to engage an underground designer for the planning phase. In addition to design, cost, and schedule expertise, the designer typically also provides or subcontracts for geotechnical engineering, environmental management, and any other technical disciplines required during planning because of specific project needs or risks. As such, the owner’s engaged design firm usually plays a significant leadership role in the planning process, regardless of whether it continues to provide design services in final design as part of a design-bid-build (DBB) project or hands over its work as part of a bridging design process to the final designer of a design-build (DB) project. NEE D S A S S E S SM ENT Ideally, prior to the start of project planning, the owner will clarify the required levels of service. This may include qualitative and quantitative parameters for level of reliability, operational capacity, economic viability, and community and public objectives. The levels of service set the stage for the planning team to develop a needs assessment document that surveys the gap between the current conditions and what is required or desirable. This is also the stage at which the owner should define other key parameters required for the planning process to move forward. For example, it should do sufficient preliminary risk work to establish an overall risk strategy and risk tolerance level, and to identify any major project risks that could require further investigation or review during planning (e.g., risks to the surrounding infrastructure or the potential for significant community opposition). A preliminary schedule should be prepared, which should consider needed utility relocation, Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Project Planning 11 The Value of Underground Construction When the San Francisco Bay Area Rapid Transit (BART) district assessed the placement of its airport extension, which opened in 2003, BART originally considered an aboveground alternative, but community leaders determined that the value of saving the aboveground space for residential and commercial uses justified the greater cost of placing the airport extension underground. easement/property acquisition and land approvals, permits and coordination with adjacent projects, environmental review, and project complexity. F E A S I B I L I TY STU D Y The intent of the feasibility study is to determine whether a project will be built to address the identified need. Considerations in the study include technical feasibility, legal requirements, political and community support, and economic viability. The following sections highlight recommendations related to some of the key considerations. Building Underground The feasibility stage is generally when owners consider whether to include one or more underground options for the project, to be evaluated in more detail in the alternatives analysis. As part of this, owners should consider the intangible value of building underground, which, although it is generally more expensive, saves aboveground space for uses that might not be feasible underground and may also offer other land development opportunities for the aboveground space (see the box “The Value of Underground Construction”). Ground Conditions and Other Technical Considerations For any underground project, one of the most significant aspects of technical feasibility is the ground—that is, the type of ground, expected behavior during construction, and the amount of groundwater encountered during excavation. During initial feasibility studies, the owner and planning team must learn enough about the anticipated ground conditions to effectively evaluate the risks associated with them. Some information may be available from desktop studies or from earlier projects constructed in the area, and some geotechnical explorations may need to be completed as part of the planning process. This can occur at the beginning in the feasibility stage or later during the planning process, depending on project needs that include but are not limited to site and environmental factors (see Chapter 3 for details on the phasing of subsurface investigations). Other critical aspects of technical feasibility to be considered are ground conditions or other project elements that lend themselves to particular construction means and methods, and any environmental regulations or community agreements that may limit space for staging, restrict spoils handling, or limit construction to specific hours. All of these will affect cost and schedule and should be considered during planning. Long-Term Value Project cost and derived benefits are often the most important considerations for an owner. During feasibility evaluations, preliminary cost estimates are developed based on Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 12 Chapter 2 feasibility-level design drawings to assist in the alternatives analysis that will follow. These estimates assist the owner to evaluate the various alternatives on a like-for-like basis, considering life-cycle costs and long-term value. Preliminary cost estimating during feasibility should establish clear assumptions, including a definition of project scope and appropriate levels of contingency that can be applied uniformly across all projects to enable realistic comparison of the options. However, owners must recognize that these estimates are limited by being done at a very early level of design development and with a lack of understanding of issues that may arise during design and construction. Although efforts should be made to produce an accurate cost estimate, the cost estimated at the feasibility stage should not be used to finalize a budget number. It should be progressed during conceptual design and then developed further in preliminary design. At this stage of development, the estimators should prepare a cost estimate that establishes a cost range. For federally funded projects, this estimate should use federal guidelines for allocated and unallocated contingencies, soft costs, and ancillary costs. This range should allow for “unanticipated costs,” variability in market conditions, and variabilities in the cost of the final scope of work. Throughout the project development cycle, the estimators should track hard and soft costs by percentage, and periodically reassess escalation factors, soft costs, actual costs, and overall market factors to ensure that the projected cost range remains a reasonable projection. AL TE R N A TI V E S AND ENV I RONM ENTAL ANA LY SIS After weighing the tangible and intangible values of a project in the feasibility stage, the owner will decide whether to proceed with the project. At this stage, most planning teams will then commence an alternatives analysis that includes environmental analysis and a preliminary risk evaluation to validate that the project can be built in the anticipated ground conditions within the desired time frame and for the desired cost. For a project with an underground alternative, the analysis usually also includes comparison of the advantages of less community impact with a higher risk of unknowns, cost and schedule variability resulting from unpredictable geological conditions, and lower life-cycle costs resulting from longer design life and less maintenance. For a project with an underground alternative, the analysis usually also includes comparison of the advantages of less community impact with a higher risk of unknowns, cost and schedule variability resulting from unpredictable geological conditions, and lower life-cycle costs resulting from longer design life and less maintenance. The purpose of the alternatives analysis is twofold: (1) define and measure the alternatives against the project goals, and (2) select a preferred alternative. As discussed in the introduction to this chapter, the alternatives analysis will likely overlap with the regulatory approval process. In addition, securing regulatory approvals may require some level of conceptual design of multiple alternatives. The environmental approval process typically is the gate for progressing the selected alternative to conceptual design. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Project Planning 13 Defining and Measuring Alternatives Against Project Goals The first objective of the alternatives analysis is to further define the specific requirements that satisfy the project goals and to develop and document alternatives and solutions with related costs and schedules. The requirements and their relative importance must be clearly detailed. The owner’s operational and regulatory requirements must be identified and analyzed to ensure that the applicable design inputs and parameters have been considered in developing conceptual solutions. Typical considerations include the following: ■■ Clear problem definition ■■ Scope of work ■■ Schedule limitations and restrictions ■■ Budget limitations and life-cycle costs ■■ Environmental implications ■■ Review of similar configurations in establishing operational parameters ■■ Political realities and community acceptability With respect to community acceptability, it is notable that numerous agencies are adopting environmental justice and community benefits policies that will further require owners to get input from people who are representative of the neighborhood where projects are being constructed. This requires a closer look at the neighborhood demographics and burden of the project than has previously been required. Planning teams should be mindful of these impacts and the need for input and allow sufficient time to undertake this thoughtfully and accurately. The design criteria should also be developed. Many owners have established standard criteria that can be used. The design criteria will clarify ■■ System functionality, ■■ Site and environmental considerations, ■■ Equipment qualifications, ■■ Fire protection, ■■ Safety, ■■ Water quality, ■■ Reliability/operability, ■■ Codes and standards,*** ■■ Quality control, ■■ Regulatory agency compliance (current and future), ■■ Basic operational and maintenance needs, ■■ Project life-cycle expectations (75, 100, 150 years), and ■■ Right-of-way requirements and availability. In association with defining the design criteria, the team should identify the design documentation that will be required, any necessary environmental mitigation, real estate and right-of-way needs, required agency submittals, encroachment permits, and utility coordination for each alternative. Selecting a Preferred Alternative Most planning teams use the documented alternatives analysis to select a preferred alternative for conceptual design, an activity that proceeds in parallel with the regulatory approval, permitting, and other processes described in the next section of this chapter. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 14 Chapter 2 As these elements of the planning process proceed in parallel, several iterations of the alternatives analysis may be required to assure that all the requirements have been identified and potential solutions have been developed. Each iteration should provide a clearer and more complete statement of the design requirements. The planning team should define decision-making criteria for the selection of the alternative, including that the preferred alternative must meet or exceed the expected levels of service. The team may elect to compare alternatives with a triple bottom line evaluation of financial, environmental, and social/local factors. RE G U LA TO R Y APPROV AL S, PERM I TS, EASEMENT S, A ND P R OP ER T Y AC Q U I S I TI O N S All discretionary approvals and formal agreements that will be required during implementation must be identified during the planning phase to ensure that they can be resolved in time for construction to commence. Underground projects often require more regulatory approval than aboveground projects. Required permits will include regulatory, resource, and encroachment. As the project matures and the footprint is refined, real estate and right-of-way agreements must be initiated. At times, these can drive the project critical path. For transit and highway projects, utility agreements for water, wastewater, discharge of dewatering, and storm water management will be necessary. For water/wastewater projects, these requirements must be resolved even if within the same agency. The ability to relocate facilities and utilities, and the cost of so doing, must be investigated at this juncture. A real estate appraiser should be included on the team to establish the value of properties being taken in either fee or as temporary construction easements. The conceptual design–level cost estimate (see the “Conceptual Design” section) should include these costs, and the acquisition process should be reflected in the integrated project schedule. It is highly recommended that the planning team evaluate the scope and schedule of other projects occurring in the area to improve coordination. This is also required to assess cumulative impacts in the environmental analysis. Projects occurring in the right-of-way will require investigation to verify the location of live and abandoned utilities. At some stage of development, this may require pot-holing, depending on the quality of as-built records. As mentioned in the discussion of the feasibility study and detailed in Chapter 3, some geotechnical investigation may commence and may be ongoing throughout project planning. Environmental Documentation The primary federal environmental and land use regulation affecting the construction industry, including underground construction, is the National Environmental Policy Act of 1969 (NEPA). NEPA requires that an environmental impact statement (EIS) be prepared for all major federal actions that significantly affect the environment. Many states have also promulgated state environmental policy acts, which have similar requirements, for example, the California Environmental Quality Act and its requirement for an environmental impact review. After completion of the EIS and other environmental documentation, regulators will issue a record of decision (under NEPA) and other relevant approvals that will certify one of the project alternatives for further development. At this stage, permitting and other activities can commence concurrently with conceptual design of that alternative. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Project Planning 15 Permits The permitting process is the controlling aspect of regulatory compliance. Underground projects require many permits from planning through construction. For efficiency, some permits should be owner-furnished, while some are more properly the responsibility of the contractor. Permits that affect the final design of the facility and that require a long lead time (see Chapter 5) are typically secured by the owner, usually sufficiently in advance to be included as part of the procurement solicitation. Owner-furnished permits needed early in the planning phase include various land use approvals and environmental permits (e.g., those issued by the U.S. Army Corps of Engineers, the U.S. Fish and Wildlife Service, and, in Washington State, the Department of Ecology). When these permits are obtained in advance of contractor selection and the provisions are incorporated into the final design documents, applicants can provide more meaningful bids, and this is recommended. For many agencies, permit acquisition is done during the design phase. In California, the owner is required to obtain a tunnel classification from the California Occupational Safety and Health Administration (Cal/OSHA) prior to advertising (CCR 1996), and this is typically done during final design when detailed geotechnical information is available. Although underground solutions do not uniformly result in more or fewer regulatory hurdles than aboveground solutions, large underground projects in jurisdictions where similar projects have not previously been constructed often create new precedents in the local jurisdiction. For example, a fire marshal may need to prepare an interpretation of building code requirements for occupied underground facilities, or new codes may need to be created for new classifications of facilities. Other permits, particularly those that are related to the means and methods of construction and may require a shorter lead time, are better furnished by the contractor. These include administrative permits, local or county construction wastewater permit discharge authorizations, temporary noise variances, demolition permits, hazardous material abatement permits (e.g., for asbestos and lead), construction-generated waste and spoils disposal permits, tunnel excavation, and temporary shoring permits. Because many details required for issuance of such permits depend on the contractor’s means and methods, it makes sense for the contractor to work directly with the permitting agency in obtaining them. (See the box “Effectively Addressing Multijurisdictional Issues.”) Effectively Addressing Multijurisdictional Issues The Massachusetts Water Resources Authority (MWRA) was involved in a court-ordered 15-year effort to clean up Boston Harbor, which required a variety of complex tunnel projects involving a high risk of personal injury to workers. The contracts for the first projects, implemented in 1989–1990, gave the contractors the responsibility for tunnel rescue. However, after the award, a separate memorandum of understanding between MWRA and the local fire departments gave a supplemental role in tunnel rescue to the fire departments. In practice, once the local fire departments were brought into tunnel rescue efforts, the potential for conflicts and delays in rescue efforts increased. In later contracts, MWRA delegated primary tunnel rescue responsibility to the local fire department, which helped avoid many of these conflicts. MWRA provided funding to equip and train the local fire department for tunnel rescue. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 16 Chapter 2 All needed approvals, permits, and reviews should be included in the project critical path schedule. Prior to securing agreements, there are often numerous activities that must be completed, particularly in cases where land acquisition is necessary. Creating and managing the schedules for these approvals can reduce the risk of later delays. For some permits, environmental review and completion of the 100% final design submittal may be required. In the event that the DB project delivery method is intended, where final design will not be developed until after a contractor has been selected, the owner will need to detail the permit requirements in the contract documents and ensure that the permitting authorities can process the required documentation within the specified time frames. Affected Third-Party Agreements Agreements with third parties, such as adjacent land owners, utility owners, or government agencies, may be required for design, construction, operation, or maintenance of the project. The need for such agreements must be identified as early as possible. For example, if a third party is providing support services for the project, such as power supply, the owner will probably need to negotiate an agreement with the third party before the agency having jurisdiction will grant permits. Even if it is not strictly necessary, it is beneficial to establish a memorandum of understanding (MOU) to obtain cooperation. Attention needs to be directed to these issues, so they do not delay time-sensitive planning processes. These MOUs may have long durations, typically over a year’s time. Rights-of-Way and Underground Easements One of the advantages of building underground is that it usually involves fewer impacts to third-party property owners. This is especially true if the tunnel or other underground facility can follow public rights-of-way, such as streets or other publicly owned property. Nonetheless, an underground project may require the acquisition of property for both temporary and permanent use. Temporary rights of entry are sometimes required to secure access for geotechnical and other investigations conducted during the planning and design process. Initial agreements for access to private property to install, maintain, or repair underground utilities are generally the responsibility of the owner. When a tunnel needs to cross under private property, even that of quasi-governmental organizations such as pipelines or railroads, underground easements must be obtained. Also, such easements should consider not only the limits of the subsurface likely to be affected by the construction but also reasonable construction tolerances. For soft-ground tunnels, the anticipated ground subsidence will likely be a major factor in the ability to obtain the required easements, and thus some level of design may have to be completed to identify this risk. Occasionally, an owner may acquire the fee interest in property needed for undergrounding if the property will be impacted so severely by the installation of the underground facilities that the affected property will lose its previous or intended utility. The nature and scope of the project will dictate the types of property interest to be acquired. Typically, underground construction projects require temporary construction easements for staging areas, temporary working areas around portals and shafts, and traffic management. Permanent easements are required where operational facilities will remain (see the box “Staging Areas”). Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Project Planning 17 Staging Areas For water and wastewater projects, staging area locations can control horizontal alignment. Spacing staging areas too far apart can negatively impact overall construction duration and increase excavation risk. For transit projects, staging areas are required at both open-cut and mined stations, because much construction activity must take place at those sites. Traffic maintenance is usually a major factor in minimizing public impact. Although tunneling and underground construction may be less invasive than surface work along most of the tunnel alignment, the shaft and portal staging areas typically are subject to a greater impact. Locating the staging areas is one of the most significant project planning activities. If adequate staging areas are not provided, the cost of additional easements will be incorporated into the bid price, and construction logistics will become more complex. In some cases, it may be beneficial for the contractor to arrange for temporary easements directly with the property owner. C O N C E P TU A L D ESI GN After selection and approval of the selected alternative, the designer and relevant members of the planning team will fully develop and document the conceptual design of the selected alternative. This typically represents approximately 15% of the final design and is documented in what is known as a conceptual design report, conceptual engineering report, or facility plan. The document usually includes the following: ■■ Scope of work ■■ Design criteria ■■ Conceptual design sketches or drawings ■■ Consequences and risk assessment ■■ Regulatory permits needed for design, construction, and operation ■■ Real estate and/or right-of-way acquisition requirements ■■ Encroachment permits needed from other jurisdictions ■■ Utility coordination requirements ■■ Storm water management requirements ■■ Coordination with other projects ■■ Conceptual design-level cost estimate ■■ Integrated project schedule The conceptual design-level cost estimate can usually be relied on, with appropriate contingencies, to serve as a budget number that can be published to funding agencies, boards of directors, and others. (Chapter 7 discusses cost estimates at different stages of design.) Following conceptual design, the owner may elect to introduce a technical review panel, a peer review structure, or a value engineering team (see Chapter 5). E S TA B L I S H I N G TH E I M PL EM ENTATI ON P LA N The implementation plan functions, alongside the conceptual design report, as documentation of key decisions made during the planning process that will guide the implementation, Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 18 Chapter 2 funding, and governance of the project through preliminary design, tendering, and beyond. Recommendations for typically important aspects of the plan are provided in the following sections. Political and Public Relations Issues The role of the public in major construction projects has significantly increased as the quest for open government has progressed and environmental review processes have called for public input and comment. Empowered by these requirements, the public has become better organized and more knowledgeable than ever. It is best for the implementation plan to make provisions for public input and comment throughout the design process, including meeting with local interest groups and community leaders (see the box “Three Examples of Community Issue Management”). Construction project websites are widely used to inform the public about design and construction progress. Information such as environmental documents, presentations, schedule information, meeting announcements, and contact information for key people can be posted for public access. It is important for the owner to use available means to freely communicate the temporary impacts of construction activities on the community. No one likes disruption, but if the owner makes honest efforts to communicate and manage the disruption, the public typically is more receptive to the project. An often-overlooked aspect of public relations is how a project engages organized labor. Contracts for large underground projects sometimes include provisions for a project labor agreement (PLA). Such agreements require that most of the craft labor be provided by the local union building trades and incorporate a no-strike clause to ensure labor harmony and mitigate the risk of construction delays caused by labor unrest. In 1993, President W.J. Three Examples of Community Issue Management To better manage the myriad of community issues that would arise when construction began on an underground light rail system, the owner of the Tren Urbano project in San Juan, Puerto Rico, established a community center in the middle of the historic district of old-town Rio Piedras, through which the light rail would run. The contractor was given a special bid item to fulfill this obligation, which greatly facilitated resolution of community concerns. Prior to and during construction of the Second Avenue Subway in New York City, the Metropolitan Transportation Authority (MTA) organized informational meetings to make stakeholders in the Second Avenue area aware of their obligations to the project and the community and to ensure full cooperation among all parties involved in or affected by construction. MTA also established a local storefront visitor center where residents could register complaints and get project updates. This helped focus the project’s attention on the community issues. Site tours for the general public also enabled community members to observe the underground construction and progress, which were not visible from the street. In support of the San Francisco Public Utilities Commission’s (SFPUC) $2 billion investment in capital improvements at the Southeast Water Pollution Control Plant, the agency conducted workshops, charrettes, job programs, plant and facility walking and bicycle tours, as well as youth and adult education. Prior to the initiation of construction, a neighborhood information center was established adjacent to the plant. During the planning phase, in addition to the environmental impact report, SFPUC also conducted an environmental justice assessment. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Project Planning 19 Clinton issued Executive Order 12836 (58 FR 7045), requiring the use of PLAs on federal and federally funded projects, if feasible. In 2001, however, President G.W. Bush issued Executive Order 13202 (66 FR 11225) rescinding the Clinton order and prohibiting federal and federally funded projects from requiring contractors to sign a PLA as a condition of contract award. As a result, most federally funded underground projects operate on a voluntary PLA basis, where the contractor has the option, but is not required, to comply with the terms of the PLA. In many cases, what drives the PLA decision is the agency’s desire to obtain union support for the project within the political sphere. It is noteworthy, however, that many contractors do not favor PLAs because they feel such agreements intrude on labor–management decisions that are more properly the responsibility of the contractor and in many cases create work rules that conflict with standard industry practice. In determining whether to incorporate a PLA, the owner should consider the local market and availability of labor: ■■ If the labor market is organized, the benefits of a PLA can be significant. The possibility of utilizing a PLA can sometimes be leveraged for more favorable work rules and can address jurisdictional disputes that might exist, for example, on river crossings between two states. A PLA can also entice nonunion competition to enter markets that may otherwise be of lesser interest, thereby further increasing competition. ■■ If the market is not strongly organized, or if there is sufficient labor capacity to complete the project without utilizing the union trades, there may be significant overall project savings without implementation of a PLA. Some work rules incorporated into the PLA can drive up costs, and can affect contractor productivity and thus schedule. In addition, local smaller subcontractors may resist participating in projects requiring PLAs because of the impact on their key employees’ benefits. These local subcontractors are typically very competitively priced, and the loss of their participation can further add to overall cost. Both positive and negative aspects of PLAs must be considered. If a PLA is to be used, it is critically important that input be solicited from local contractors and/or their associations (e.g., associated general contractors). These are the parties that best know the implications of the work rules, past customs and practices, and potential areas of conflict, as well as the major cost drivers. In addition, the tunnel contractor community should be consulted, as work rules in the underground industry—such as reporting location, start time, change houses, and shift differentials—are not necessarily the same as those typically used for aboveground projects. Funding During the planning phase, projects will be incorporated into long-term financial and capital plans. The early stages of project planning are an excellent time for owners to investigate long-term, low-cost supplemental loans and develop relationships with such entities as the state water boards, the U.S. Federal Transit Administration, and the U.S. Environmental Protection Agency. It takes time to get prequalified for alternative funding sources, such as the Clean Water State Revolving Fund and the Water Infrastructure Finance and Innovation Act. In some cases, there may be preference given for nationally significant projects that meet sustainability objectives. It is important that owners and their financial staff actively participate in the early investigation, as modification to internal financial policies may be required. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 20 Chapter 2 Transit projects typically compete for federal funding, under the Capital Investments Grant Program, formerly the New Starts Program, for fixed guideway projects. Such projects must demonstrate benefits including mobility improvements, environmental benefits, operating efficiencies, cost-effectiveness, transit supportive land use, and economic development effects. Through the Federal Transit Administration, several billion dollars can become available annually. The grant program is very competitive, often oversubscribed, and always political. Funding will come with agency-specific requirements, such as the use of U.S. steel, local hiring, bidding periods, labor compliance audits, and other social engineering requirements. In some cases, funds are reimbursable or must be matched. It is very important that the owner be thoroughly familiar with all terms and conditions of loans or grants, to ensure that it wishes to pursue the alternative sources of funding. Not only the owner’s financial staff, but the planning and engineering staff must understand these issues, because these individuals are most knowledgeable about the specific project details. This requires lead time and planning to meet loan application deadlines. Preparing project life-cycle cash flow analyses that look at encumbrances, spending, and reimbursement is standard practice. Funding of underground projects using public–private partnerships (PPPs, or sometimes P3s) is relatively new in the United States, but may become more prevalent soon (see the box “DC Water”). Discussion of funding mechanisms for PPPs is beyond the scope of this book. DC Water In 2014, DC Water, a regional water agency, financed a portion of its underground construction using 100-year maturity century bonds. As stated by General Manager George S. Hawkins, We have long understood both the immense environmental impact of the Clean Rivers Project and the remarkable lifetime duration of the tunnels. This issuance enables DC Water to spread the costs of the project over the minimum expected life of the tunnels and be supported by future ratepayers who will also benefit. (DC Water 2014) Delivery Considerations For some projects, as the planning phase transitions to preliminary design, the owner may begin considering issues related to the ultimate delivery of the project, and these may be documented in the implementation plan. For example, specific project characteristics or risks may suggest early involvement of risk or insurance experts. Another question that will often arise during the preliminary or final design phase is which project delivery method should be used, and this may impact the approach to funding. The most common contracts used in the underground construction industry are DBB and DB. Other delivery methods, such as construction manager at risk (CMAR), alliancing, and PPPs, are less frequently used in the underground industry. The project delivery methods are detailed in Chapter 10, along with a discussion of their relative advantages and disadvantages for specific project circumstances. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Project Planning 21 C O N C LU S I O N S AND RECOM M END ATI ON S The planning phase of a project is critical to the project’s success. Decisions made during project planning will have significant impacts on if and how the project proceeds and will ultimately result in one project alternative being chosen as the selected design. ■■ Recommendation 2-1: The owner should select people who have underground experience for its planning and project teams, accounting for the disciplines required for its unique project. This will typically require engagement of underground specialists to augment the owner’s staff. ■■ Recommendation 2-2: A thorough and accurate needs assessment is required to ensure that the project will meet the owner’s expectations and objectives. When evaluating alternatives, the intangible value of placing the constructed facility underground should be considered. The decision-making process should include a cost– benefit evaluation not only of the capital construction cost but also of the life-cycle cost and long-term value to the overall community. ■■ Recommendation 2-3: Estimates developed during the feasibility study should not be used to establish final capital budgets. However, conceptual design-level cost estimates can generally be used for this purpose, if sufficient contingency has been included to allow for risks and uncertainties. ■■ Recommendation 2-4: The owner should consider which regulatory permits are best obtained by which parties and at what stage. Owners should obtain some permits before advertising, whereas others should be left for the contractor to obtain after contract award. ■■ Recommendation 2-5: The planning team should allow for staging areas that are sized adequately for the expected construction operations. ■■ Recommendation 2-6: The owner should consider the advantages and disadvantages of incorporating a project labor agreement (PLA) and should obtain input from local contractors concerning local customs and practices and from underground contractors about specific work rules affecting subsurface work before finalizing the PLA with the labor unions. R E FE R E N C E S CCR (California Code of Regulations). 1996. Title 8, Subchapter 20: Tunnel safety orders. Article 8, section 8422: Tunnel classifications. Sacramento: California Office of Administrative Law. DC Water. 2014. DC water announces successful sale of $350 million green century bonds. DC Water News. July 14. www.dcwater.com. Accessed January 2019. Executive Order 12836. 1993. Revocation of certain executive orders concerning federal contracting. Fed. Reg. 58(6875): 7045. Executive Order 13202. 2001. Federal acquisition regulation; Preservation of open competition and government neutrality towards government contractors’ labor relations on federal and federally funded construction projects. Fed. Reg. 67(226): 11225. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 31 Subsurface Conditions I N TR O D U C TION Reliable knowledge of subsurface conditions is essential to successful underground construction. Knowing the subsurface geotechnical conditions is necessary to determine project feasibility and ultimately the final design and methods for construction. Management of underground construction risks also requires an understanding of the subsurface conditions to allow the selection of equipment and construction procedures that will efficiently permit safe underground construction. Subsurface conditions also have a strong and unavoidable presence in underground construction contracts. Differing site conditions (DSCs)—conditions that vary from those presented in the contract—can be a major source of cost and time overruns on tunneling projects. This is because type of excavation and ground support methods and time to complete depend on the behavior of the ground. Notification, investigation, and entitlement for cost and schedule impacts of DSCs can be straightforward if done expediently and in line with the contract by qualified personnel. This chapter focuses on the importance of a well-designed subsurface investigation program and the responsibilities of contract parties to understand and respond to ground conditions throughout the project. Chapters 10 and 11 describe the contract methods the tunneling industry has established to deal with the uncertainty of subsurface conditions and address contract changes associated with DSCs. Most underground construction contracts are written in such a way that the owner takes responsibility for the ground and the contractor takes responsibility for the means and methods of construction (see Chapter 10). Although these responsibilities seem to be discretely defined, in reality there is often dispute about the impact of a DSC, and even whether an alleged DSC was the result of inadequate or incorrect ground characterization (the owner’s responsibility) or was precipitated by the contractor’s chosen construction means and methods (the contractor’s responsibility). Avoiding such disputes begins with a comprehensive subsurface investigation program, which reduces the likelihood of these disputes and makes disputes easier to resolve: Image courtesy of National Park Service, U.S. Department of the Interior, 1979. From Prints and Photographs Division, Library of Congress (HAER LA,29-THIB,1A—3) Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 23 24 Chapter 3 ■■ The subsurface investigation program improves the accuracy of geotechnical interpretations and reduces the initial risk of unanticipated ground conditions being encountered. ■■ Based on the program, geotechnical documents are developed that define the parties’ responsibilities related to anticipated and encountered ground conditions. This chapter begins with a discussion of the importance of subsurface investigations and a description of the implementation of a comprehensive subsurface investigation program, including selecting the geotechnical consultant, establishing the scope of the geotechnical investigation, phasing the program, and determining the methods. Some detailed considerations are also included. The types of geotechnical documents that are prepared during subsurface investigation and their incorporation into the bid documents and contract provisions are summarized. Recommendations to owners, geotechnical consultants, design engineers, and contractors are presented in the conclusion. IM P O R TA N C E OF COM PREH ENSI V E SU BSUR FA C E INVEST IG A T IONS The best way to mitigate the risk of DSCs is to conduct a thorough subsurface investigation. The investigation must consider marked changes in subsurface conditions that may occur over short distances along an alignment. A thorough investigation should be tailored to the level of complexity of the project site conditions and focused to investigate risks presented by the site and the construction methods contemplated for the project. As the investigation proceeds, it is useful to reassess the risks and identify follow-up investigations to further reduce uncertainties based on early findings. The properties of the ground behavior during excavation and support, as well as over time, are as critical to project success as the properties of the steel and concrete used on an aboveground facility. Although some ground-related schedule delays and cost overruns may result from the contractor’s selected equipment and methods or the lack of availability of skilled labor, many are associated with subsurface conditions. This was demonstrated in a comprehensive evaluation of 84 tunnel projects by the U.S. National Committee on Tunneling Technology (USNCTT 1984). That study indicated that adequate definitions of ground conditions resulting from detailed geotechnical investigations reduced the potential for claims for DSCs. Figure 3-1 depicts the inverse relationship between change requests as a result of the ground (y-axis) and the thoroughness of geotechnical exploration programs, as indicated by linear feet of boreholes per route foot of tunnel alignment (x-axis). Over the years, contract elements, such as geotechnical baseline reports, which are described further in a following section, have been advanced to address definition of ground conditions in the construction contracts. USNCTT also found that more claims were made as a result of subsurface geologic conditions than for any other aspect of tunnel construction. Figure 3-2 breaks down the frequency of problems and claims by 14 different typical causes. It is important to consider that the use of mechanical excavation by tunnel boring machine and support by precast concrete tunnel lining is now much more common than prior to 1984. An update of the Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. “Changes” requested, As % of Engineer’s Estimate As % of Contractor’s Bid Subsurface Conditions 25 80 Bid Data Only Available Selected Case Studies 2, 3, 6, 7, 8, 9 70 Project Data Not Shown: X Axis Y Axis Y Axis 0.01 188.1 139.7 9.75 197.8 235.0 0.41 72.6 126.9 60 50 40 30 20 10 0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 Boreholes, in linear feet per route foot of tunnel alignment Source: USNCTT 1984 FIGURE 3-1 Change requests relationships 1984 study may find different sources of problems and claims because of the changes in technology. In reviewing these data, it is worth noting a few reasons why subsurface exploration programs are more important in underground construction than in similar exploratory programs associated with aboveground construction. First, unlike steel and concrete— engineered materials that have predictable and well-defined properties and exhibit relatively narrow ranges of behavior—soil and rock are typically anisotropic and heterogeneous over short distances, varying over the tunnel profile both vertically and horizontally. They also vary in mechanical properties such as strength, stiffness, and permeability—and the design must take into account all variations. Second, most construction involves complete contact with and encapsulation by the ground, which must be safely excavated and supported over the life of the facility. The ground remains a long-term part of the project and interacts with the lining to provide a stable tunnel. Consequently, the properties of the ground behavior Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 3 26 (a) Problems % of Tunnels 0 10 20 30 40 50 60 50 60 I Running, flowing, or squeezing soil Blocky/slabby rock, spalling, rockbursts, overbreak, cave-ins Groundwater inflow Noxious or gassy fluids on ground Obstructions (boulders, piles, high rock, cemented sand) Surface subsidence Hard, abrasive rock (tunnel boring machines) Mucking Soft zones in rock Pressure binding Steering problems Soft bottom in rock Existing utilities Air slaking (b) Claims % of Tunnels 0 10 20 30 Blocky/slabby rock, spalling, rockbursts, overbreak, cave-ins 40 I Running, flowing, or squeezing soil Soft bottom in rock Groundwater inflow Noxious or gassy fluids on ground Soft zones in rock Surface subsidence Hard, abrasive rock (tunnel boring machines) Mucking Pressure binding Steering problems Obstructions (boulders, piles, high rock, cemented sand) Existing utilities Air slaking Adapted from USNCTT 1984 FIGURE 3-2 Reported problems (a) and claims (b) on 84 rock tunnel projects Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Subsurface Conditions 27 during excavation and support, as well as over time, are as critical to project success as the properties of the steel and concrete used on an aboveground facility. I M P L E M E N TA TI ON OF A SU BSU RF ACE INVEST IG A T ION P R OG R A M To implement a successful program, it is important to select an experienced and knowledgeable geotechnical consultant who is familiar enough with the regional conditions to scale the investigation effort to the anticipated complexity of local site conditions, and familiar enough with underground construction means and methods to focus the investigation on project risks. A technical review panel, if used, will typically have input into the type and extent of geotechnical investigations and testing. Geotechnical services are traditionally procured directly by the owner or subcontracted by the owner’s designer. Alternative procurement methods such as design-build involve varying degrees of contractor-provided geotechnical investigation work. Sometimes, work is performed by more than one geotechnical firm over the project life, which can be years or even decades from planning and investigation through construction. Standards used during investigations should be clearly identified and documented (e.g., whether the investigations followed the USBR Engineering Geology Field Manual [2001] or the Caltrans Geotechnical Manual [2006–2018]). Scope of the Investigation Program The specific aspects of an exploration program are a function of project factors such as the complexity of the geology, the size and complexity of the underground excavations, the likely method of construction, and potential impacts on adjacent structures—and of the risks associated with these factors. Geotechnical conditions can be significant sources of risk on underground projects. Through the risk management process (see Chapter 4), specific risks will be identified that can help determine the level and focus of the geotechnical investigation and testing appropriate for the project and the project phase. Information should be collected both for engineering design and for assisting bidders in evaluating means and methods and for estimating production rates. The International Tunnelling Association Working Group 2 has summarized in broad terms the important elements associated with a tunnel project on which site investigations should be focused (ITA 2015). At a minimum, the following geotechnical factors should be carefully evaluated during exploration: ■■ Groundwater –– Presence of groundwater and hydraulic heads for single or multiple water levels, including multiple aquifers and possible perched groundwater conditions –– Groundwater regime near fault zones, where relatively high clay content and/ or highly brecciated and permeable zones could create abrupt changes in the phreatic surface –– Presence of artesian or confined groundwater beneath tunnels and in or below shaft and open-cut excavations –– Properties of aquifer zones (e.g., permeability, transmissivity, and flow gradient) that will impact pumping rates and volumes, well spacing, and ground treatment options Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 28 Chapter 3 –– Chemistry of the groundwater, including pH and the presence of any contaminants that could affect short-term and long-term performance of the structural support systems and disposal or handling of pumped groundwater –– Nearby contamination that could migrate toward the excavation with prolonged pumping or groundwater inflow ■■ Soil and rock –– Extent, thickness, and nature of contacts between various types of soil and rock along the alignment, especially at portals and buried valleys –– Weathering profile, particularly at portals, buried valleys, or where tunnel is shallow –– Properties of soil and rock that will impact design, ground improvements, and construction (e.g., shear, tensile, unconfined compressive strength, and triaxial strength; deformation modulus; shear wave velocity, in situ stress; unit weight; grain size; mineralogy; abrasivity; corrosion potential) –– Orientation, continuity, spacing, and condition of naturally occurring discontinuities (e.g., joints, bedding, shears, and faults) –– Likely ground behavior based on analysis of test excavations, exploratory shafts and adits, prior local experience, rock mass and support classification systems (Marinos and Hoek 2000; Barton 2002; Bieniawski 1989; Skinner 1988), and soil behavior classifications (Heuer and Virgens 1987) –– Slope stability characteristics, especially near portals A common geologic nomenclature and terminology should be established for use in logging, for example: ■■ Unified Soil Classification System for soils (ASTM D2487) ■■ Compton (1985) and Travis (1955) for rock-naming convention ■■ International Society for Rock Mechanics (Ulusay 2015) for estimated rock strength ■■ Rock mass quality (Q) (Barton 2002) ■■ Rock Mass Rating (RMR) (Bieniawski 1976, 1989) ■■ Geological Strength Index (GSI) (Marinos and Hoek 2000) Use of these standards should be audited and enforced for consistency, and deviations should be documented. Phasing the Investigation Program The level of detail of geotechnical characterization should be scaled to the phase of the project. For example, in early design, desktop studies, based on existing information, are often relied on. As the project proceeds to the preliminary stage, the desktop study is used to focus the investigations, but often the alignment, profile depth, and portal and shaft locations are not completely defined, so it is not sensible to expend a substantial portion of the full investigation budget at that stage of the project. During detailed design—preferably after establishing the location and depth of all underground work and likely construction methods—the investigation should be completed. The number of exploration phases will vary depending on the size and complexity of the project, and the need to gather data to address and resolve the risks involved in the work. Fewer phases may be needed on small projects with a single alignment and profile between Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Subsurface Conditions 29 well-defined end points, whereas a major city subway system with multiple stations and tunnel reaches might require many exploration phases beginning 10 or more years prior to construction. On some projects, another phase of exploration is added during bidding to respond to questions about ground conditions at specific locations and to identify parameters applicable for specific construction means and methods. On underground projects in complex ground conditions, some collection and evaluation of subsurface data may continue through construction for comparison/confirmation with basis of design and baselines for bidding. Boreholes drilled for monitoring can be logged for this purpose, and excavated surfaces can be mapped. Anyone who has designed or built a second parallel tunnel (or is planning inspection or rehabilitation works) decades after the first tunnel has been constructed would agree that good geologic records from the first tunnel are invaluable. Such a potential future use is another reason to document and store records of conditions encountered during construction. Investigation Methods Geotechnical investigations generally include borings and various other types of investigations. For example, a hydroelectric project in difficult-to-access terrain would use different program elements for site investigation than a new underground transit system through an urban core. Table 3-1 contains a summary of the basic elements. TABLE 3-1 Commentary on investigation methods Investigation Method Commentary Desktop study of regional geology, groundwater resource, seismic hazard, flood risk Potential sources include seismic hazard maps, Federal Emergency Management Agency (FEMA) maps, U.S. Geological Survey (USGS) and Canadian Geotechnical Society maps, city building permit files, and consultant files. Desktop study of past land uses Potential sources include historical aerial photos and history of grading, potential for contamination, typically available in Phase 1 Environmental Site Assessment (ASTM E1527), if available. Surficial mapping, test excavations, and remote sensing Examples include geologic and outcrop mapping, test pits, large-diameter borings, and geophysical methods. Geological mapping should be performed before borings are drilled. Satellite images Use and review historical satellite images to evaluate geomorphic evolution and changes to landscapes over time. Borings Tailor to maximize sample recovery. Drive samples should be obtained in soil for correlation purposes. Practice judicious use of vertical and angle holes. Consider horizontal holes, especially if portals are planned. Downhole investigation methods Depending on hole stability and use of casing, one could include borehole televiewer, packers for permeability testing, pressuremeter/dilatometer for modulus and confining stress, and hydraulic fracturing for rock stress measurements. Cone penetrometer test (CPT) Often more economical than borings; however, this method requires calibration with nearby borings. Only limited sampling (but continuous logging) can be obtained, thus CPT should only replace a fraction of the borings. Fixed borehole instrumentation Include water pressure and level monitoring (e.g., piezometer). Exploratory tunnels and shafts Expensive but occasionally warranted given complex or unknown geology; consider horizontal borings to replace exploratory tunnels if conditions permit. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 30 Chapter 3 Program Details As noted earlier, this chapter focuses on describing an approach to designing an effective subsurface investigation program, rather than detailing how to conduct geotechnical investigations. However, because the subsurface investigation feeds directly into the contract, it is appropriate to comment on some methods and practices that enhance the accuracy and usefulness of investigations to collect subsurface data. First, the overall level of effort should be consistent with the standard of care within the engineering and geological community, which is generally defined by the recommendations of the USNCTT 1984 report, Geotechnical Site Investigations for Underground Projects, and other more recent guidelines from the International Tunnelling and Underground Space Association (ITA 2015) and the U.S. Bureau of Reclamation (USBR 2001). These generalized recommendations should be adapted by qualified professionals for the complexity of the site conditions and details of the project. On a more detailed level, the following are recommended: ■■ Vertical borings should be placed at each shaft. For large-diameter shafts (>40 feet in diameter), consider three borings, depending on the variability of the lithology. Depth of borings should be at least two shaft diameters below the expected bottom. ■■ Test shafts and test adits may also be effective in collecting data for large or complex underground openings, in complex geology, or when seismic faults or shear zones need to be defined. Construction procedures for large openings need to be generally sensitive to adverse conditions, such as groundwater flows, unstable soils or rock, mixed geology, faults, dikes, and lenses. ■■ Rock core collected above the tunnel horizon is useful in understanding the geologic model, projecting formation characteristics along bedding can be projected to other portions of the alignment, and in capturing statistically significant quantities of information to characterize the geologic units anticipated in the tunnel. Therefore, beware of the false economy of only coring the tunnel horizon. Core sampling will also help define the thickness of the weathering profile and how rock mass properties like permeability change with depth. Multiple-tube core barrels should be used to improve retrieved core quality. Additionally, oriented core is valuable for the development of the geologic model, project faults, and stereographic projections, which can be used to identify rock kinematic stability risks (e.g., tunnel wedges). The technique of oriented core is today largely replaced by downhole systems that image the borehole wall, thereby documenting structural geologic details. ■■ Soil borings employing rotary wash methods and drive sampling suffer because sampling is not continuous and thus must rely on predetermined sampling frequency or the judgment of field personnel. However, provision can be made to sample nearly continuously in the tunnel horizon and throughout the depth of shafts. This may result in 18 to 24 inches of sample for every 30 inches drilled, which is generally appropriate, especially if supplemented by split-spaced sonic drilling, which can produce continuous soil core samples suitable for the standard suite of soil classification tests, as well as retrieve larger particle sizes (e.g., gravels and cobbles). One common sampling device for soil exploration is the split-barrel sampler, with a 2-inch nominal size for the standard penetration test (ASTM D1586) and a 2.5- or 3.0-inch nominal size, which is referred to as the California modified sampler, for strength testing (although sample disturbance is likely and should be considered Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Subsurface Conditions 31 in reporting the results). Shelby tube samplers (ASTM D1587/D1587M) can also obtain undisturbed samples for laboratory testing. ■■ Moisture content affects strength of weak rock much like it affects soil samples. Stress relief can also affect core strength compared to in situ strength, but typically to a lesser degree. In situations where these effects are significant, they should be addressed in the geotechnical reports. ■■ If inconsistencies exist between fracture frequency data from field logs and from televiewer data, then these inconsistencies should be explained in the geotechnical reports. ■■ In certain parts of the country such as California, where block-in-matrix rock is widespread and where intermediate geomaterials straddling the border of soil and rock are common, it is important for the investigation and design team to have a common approach to use of the rock quality designation (RQD) soundness criteria (Deere and Deere 1989). Also, in these conditions, defining minimum block size scaled to the size of the project and logging volumetric block proportion (Medley 1997) yields useful correlation to material properties. ■■ Borings should extend at least two tunnel diameters below the proposed alignment and below cutoff wall depths at deep excavations for shafts and stations. Initial-phase borings are often not deep enough and end up being unsuitable for the final selected alignment. It may be desirable to extend early-phase borings three or more tunnel diameters below the greatest feasible depth. ■■ Borings should be made for double duty, when possible, by installing such things as standpipes, multiple piezometers, inclinometers, and/or extensometers, and/or performing downhole and crosshole geophysical testing. ■■ The headspace within standpipes should be tested for the presence of gases, which can be either heavier or lighter than air. This information, along with past experience, should be considered when establishing the tunnel classification before the work begins (OSHA 2010). Given the length of time and expense to conduct the geotechnical investigation(s), the owner typically conducts most of the geotechnical work, even for design-build projects. Tender documents may include requirements for the performance of additional geotechnical exploration and testing, which can be used to confirm design parameters or even adjust baseline geotechnical conditions. Exploration by the contractor at this stage focuses on gathering data specific to the contractor’s means and methods, production rates, cost, risk, and the final structural design. For further information on subsurface investigations for design-build projects, see the chapter on subsurface explorations in Brierley et al. (2010). U S E O F G E O T ECH NI CAL REPORTS AS C ONT R A C T DOC UMENT S Geotechnical memoranda and reports should be clear and concise. They should address likely accuracy of the data and interpretations made from the data; and where called for, they should establish clear baselines. Several types of geotechnical reports are developed during geotechnical exploration in concert with the development of the project design. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 32 Chapter 3 Geotechnical Data Reports All factual geotechnical data collected during geotechnical exploration should be collected into a single volume. This collection of factual data is generally called the geotechnical data report (GDR). The GDR should contain the following: ■■ Description of the project, regional and site geology and groundwater information, topography and surface features, seismicity, and environmental considerations ■■ Boring, trench, and test pit logs ■■ Piezometer data ■■ Core photos ■■ Geophysical surveys ■■ Field tests (e.g., cone penetration tests, direct shear block tests, in situ stress measurements, slug tests, pump or aquifer tests) ■■ Geologic maps of surface outcrops and exploratory/test shafts and test adits ■■ Laboratory test data ■■ Annotated photos of outcrops Applicable exploration, field, and laboratory test data from nearby construction projects may also be included, usually as appendixes. Environmental reports may also be appended or provided as a separate report. All standards and procedures need to be clearly documented. The consensus in the underground industry is that the GDR should be included as part of the bid documents and the final construction contract. Thus, with the GDR being a contract document, both the owner and the contractor are contractually bound by the same geotechnical data. These data are characterized for contractual purposes for use in evaluating DSCs in the geotechnical baseline report (Edgerton 1998). Geotechnical Interpretative Reports The project designer will generally request a wide variety of geotechnical input in the form of written interpretations and analyses from the geotechnical specialist. These interpretations and analyses may take the form of desktop studies, design memos that address specific geotechnical questions, or more comprehensive reports. In any case, they are often modified over the course of design development as new data become available and design decisions are made. Usually, the designer will require geotechnical interpretations as relevant to a specific project. Such interpretations may include the following: ■■ Characterization of major geologic layer boundaries, descriptions of the properties of the geologic units within each boundary, and groundwater levels ■■ Structural design criteria, such as bearing capacities ■■ Applicable construction methods for the tunnels and shafts and their associated risks ■■ Anticipated dewatering volumes based on assumed excavation geometry, shoring or lining methods, grouting methods, and free-field groundwater regime ■■ Feasibility of other groundwater control methods, such as cutoffs, ground freezing, and grouting ■■ Groundwater and soil/rock geochemistry, including heavy metals and contamination that may affect groundwater treatment for disposal ■■ Presence of hazardous gases (methane and hydrogen sulfide) ■■ Lateral earth pressures and groundwater pressures for excavation support design ■■ Permanent tunnel lining ground loads and groundwater pressures Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Subsurface Conditions 33 ■■ Slope stability analyses, particularly at the portals ■■ Free-field seismic ground motions including shaking and permanent deformations ■■ Permanent deformation from fault movement ■■ Liquefaction potential ■■ Structural loading from earthquake-induced load ■■ Construction-induced settlements ■■ Buoyancy for underwater tunnels ■■ Recommendations for specifications Typically, these documents are made available to bidders in the interest of full disclosure. They are not intended to be relied on by bidders and indeed may be misleading if they developed prior to the final phase of borings and final design. It is recommended that geotechnical interpretive reports and technical project memoranda be labeled as “drafts.” If such documents are made available to the bidders, it is recommended that they be issued for information only and not incorporated into the contract documents. Geotechnical Baseline Reports Since the early 1970s, the bid documents for many large underground construction projects have included some form of a geotechnical design basis report. This practice was first suggested in Better Contracting for Underground Construction (USNCTT 1974). Over time, these design basis reports have evolved into the geotechnical baseline report (GBR) with a shift in emphasis from basis of design to basis for bidding. The baseline conditions presented in the GBR should be extrapolated from available exploration programs and other data, interpretations, and experience related to a project area. Consequently, the baselines presented in the GBR may differ from, and contractually supersede, the subsurface data presented in the GDR (see the box “GBR Baseline Conditions”). GBR Baseline Conditions A baseline in the GBR might describe the quantity, size, and strength of boulders to be encountered along the alignment. This baseline would likely be developed using data from nearby construction projects in the same geologic units rather than data from site-specific explorations, because of the comparatively low volume of soil sampled in those explorations and correspondingly low probability of hitting a boulder in the borings, not to mention the inability of typical soil-boring methods to actually sample the boulder. If no boulders were hit, there would be no data related to boulders in the factual GDR, but field notes of blockages encountered while drilling, drill chatter, and the data from nearby construction in the same geologic units would testify to the presence of boulders. The American Society of Civil Engineers publishes suggested guidelines for developing GBRs that include specific recommendations for organization and content, length, who should write the document, how to write specific baselines, and the time and money that should be allocated to developing a GBR (Essex 2007). These also include a detailed description of the baselines that should be included. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 34 Chapter 3 The GBR should be completed with the final design, plans, and specifications. Several iterations of the GBR will typically be required to achieve the level of precision and brevity needed for a contractual document, as discussed in Chapter 5. It is also important to check the consistency between the GBR and the rest of the contract document package including bid item descriptions, bid quantities, and technical specifications that may constrain construction means and methods. Preparation of the GBR is usually a collaborative effort between the geotechnical specialist and a tunnel designer experienced in construction and preparation of appropriate baselines for underground construction. As stated previously and discussed further in Chapter 11, the GBR sets the basis for bidding the project and assessing the merit of claims of DSCs. In this manner, it allocates risk between the owner and the contractor, distinguishing the owner’s responsibility for the ground and the contractor’s responsibility for the construction means and methods. Although in principle it may appear to be in the owner’s and designer’s purview to apply biases to the baseline conditions just as one might bias bid quantities as a form of contingency, this is not good practice and not recommended. A biased baseline is misleading to bidders, who typically not only have a much shorter time to digest and make independent interpretations of the data, but also a contract right to relief under the DSC clause in the contract (see Chapter 11). Owners must be aware of unintended consequences in biased baselines. For example, biasing baseline ground properties to have a conservative quantity of ground support measures can be unconservative from an excavation rate perspective. In the end, baselines must fairly establish the allocation of ground risk between the owner and the contractor. GBRs are not intended to be the single source of all relevant facts to cover every possible outcome. A GBR may be 40 pages long, whereas a GDR may be 1,000 pages long. Thus, GBRs are meant to be brief (i.e., able to be read in one sitting). Ground behavior influenced by contractor means and methods, such as overbreak and expected advance rates, are typically not baselined. The GBR is prepared prior to bidding without knowledge of the contractor’s choices of means and methods of construction. This is why the GDR is also provided as a contract document. Because both the GDR and the GBR are contract documents, in the interest of clarity, the GBR should explain where baselines appear to deviate from the data. The order of precedence in the event of conflict is typically established in the construction contract such that the GBR has priority in the event of conflicts. The goal of clarity has hopefully resulted in explanations of differences, eliminating the need to review precedence most of the time. For further information on geotechnical reports for design-build projects, see the chapter on geotechnical reports in Brierley et al. (2010). Project delivery models continue to evolve and mature in different regions of the world, and despite widespread recommendations by engineers and contractors and widespread use of GBRs in the United States, their use globally remains mixed. Canada saw a wave of public–private partnership (PPP) transit development projects beginning around 2012, where the owners offered financial incentive (paying extra) for the contractor to take the ground risk as a means of gaining better cost certainty for a defined price. The industry would benefit from a post-project review of the cost–benefit relationship of this approach. The rest of the world is seeing regional pockets where the GBR or geotechnical reference conditions are catching on, such as in Hong Kong, and in areas where they are not. Geotechnical Baseline Reports for Construction: Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Subsurface Conditions 35 Suggested Guidelines (the “Gold Book”) was published in 2007 (Essex 2007). With many lessons learned in the past 12 years, an update may be warranted. Disclaimers and Warranties It needs to be understood by all parties to a contract that the geotechnical specialist is not making a warranty by expressing a baseline. Baselines do provide contractors the opportunity to bid on the same project, and to come equipped to excavate it. Generally, baseline limitations are clearly stated in the GBR. Although following the rules of thumb mentioned in this chapter will generally result in data that are sufficient to adequately characterize the ground for construction, there will always be unanticipated ground conditions along an alignment. For example, if an investigation gathers borings equal to 1.5 times the alignment footage, then that is like taking a 1-cup sample from a 10-cubic-yard dump truck. Geologists, hydrogeologists, and geotechnical engineers cannot predict every ground condition or behavior, but the more experience they have with underground construction, the more accurate their assessments, estimates, and predictions will be. If an investigation gathers borings equal to 1.5 times the alignment footage, then that is like taking a 1-cup sample from a 10-cubic-yard dump truck. C O N C LU S I O N S AND RECOM M END ATI ON S Because subsurface conditions are extremely influential in underground projects, it is not only in the owner’s best interests but also the best interests of the successful project to conduct a thorough subsurface investigation program and to ensure that the results of the investigation are incorporated appropriately into the bid documents and contract provisions. ■■ Recommendation 3-1: The guidelines set forth in the U.S. National Committee on Tunneling Technology (USNCTT)’s 1984 report and more recent summaries of the level of investigation effort published by International Tunnelling and Underground Space Association (ITA) Working Group 2 (ITA 2015) should be used as a guide in planning and conducting geotechnical investigation programs. Owners and project sponsors should modify the level of effort based on their tolerance for risk and ability to cope with changes caused by differing site conditions. Sufficient budget and schedule should be allocated to the investigations at all phases. ■■ Recommendation 3-2: The investigation should be tailored to the complexity of the project site conditions and focused to investigate risks presented by the site and the construction methods contemplated for the project. As the investigation proceeds, it is useful to reassess the risks and refocus supplemental investigations based on early findings. ■■ Recommendation 3-3: The recommendations set forth in Geotechnical Baseline Reports for Construction: Suggested Guidelines (Essex 2007) should be followed in the preparation of geotechnical reports. ■■ Recommendation 3-4: Include both the geotechnical data report (GDR) and geotechnical baseline report (GBR) as contract documents, and define precedents in case of conflicts. Construction contract documents should include these two reports Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 3 36 but exclude any geotechnical interpretive reports, which may be made available to the bidders for information only. ■■ Recommendation 3-5: Depending on the scale of the project, complexity of anticipated subsurface conditions, and the amount of geotechnical work performed in advance by the owner, preparers of design-build tender documents should consider including requirements for confirmation of design parameters through the performance of additional geotechnical exploration and testing. Baseline geotechnical conditions may need to be adjusted accordingly. RE FE R E N C E S ASTM D1586. 2018. Standard Test Method for Standard Penetration Test (SPT) and Split-Barrel Sampling of Soils. West Conshohocken, PA: ASTM International. ASTM D1587/D1587M. 2015. Standard Practice for Thin-Walled Tube Sampling of Fine-Grained Soils for Geotechnical Purposes. West Conshohocken, PA: ASTM International. ASTM D2487. 2017. Standard Practice for Classification of Soils for Engineering Purposes (Unified Soil Classification System). West Conshohocken, PA: ASTM International. ASTM E1527. 2013. Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process. West Conshohocken, PA: ASTM International. Barton, N. 2002. Some new Q-value correlations to assist in site characterization and tunnel design. Int. J. Rock Mech. Min. Sci. 39(2):185–216. Bieniawski, Z.T. 1976. Rock mass classifications in rock engineering. In Exploration for Rock Engineering: Proceedings of the Symposium on Exploration for Rock Engineering. Rotterdam, The Netherlands: A.A. Balkema. Bieniawski, Z.T. 1989. Engineering Rock Mass Classifications. New York: John Wiley and Sons. Brierley, G.S., Corkum, D.K., and Hatem, D.J., eds. 2010. Design Build: Subsurface Projects, 2nd ed. Littleton, CO: SME. Caltrans (California Department of Transportation). 2006–2018. Geotechnical Manual. Sacramento: Caltrans. Compton, R.R. 1985. Geology in the Field. New York: John Wiley and Sons. Deere, D.U., and Deere, D.W. 1989. Rock Quality Designation (RQD) after Twenty Years. Contract No. DACW39-86-M-4273. Washington, DC: U.S. Army Corps of Engineers. Edgerton, W.W. 1998. Site investigations: A guide. Civil Eng. (June): 13A–16A. Essex, R.J., ed. 2007. Geotechnical Baseline Reports for Construction: Suggested Guidelines. Reston, VA: American Society of Civil Engineers. Heuer, R.E., and Virgens, D.L. 1987. Anticipated behavior of silty sands in tunneling. In Rapid Excavation and Tunneling Conference: 1987 Proceedings. Edited by J.M. Jacobs and R.S. Hendricks. Littleton, CO: SME. pp. 221–237. ITA (International Tunnelling and Underground Space Association). 2015. Strategy for Site Investigation of Tunnelling Projects. ITA Report No. 15. Châtelaine, Switzerland: ITA. Marinos, P., and Hoek, E. 2000. GSI: A geologically friendly tool for rock mass strength estimation. In GeoEng 2000: An International Conference on Geotechnical & Geological Engineering, Melbourne, Australia. Lancaster, PA: Technomic. pp. 1422–1442. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Subsurface Conditions 37 Medley, E. 1997. Uncertainty in estimates of block volumetric proportions in mélange bimrocks. In Engineering Geology and the Environment, vol. 1. Edited by P.G. Marinos. Boca Raton, FL: CRC Press. pp. 267–272. OSHA (Occupational Safety and Health Administration). 2010. 29 CFR 1926.800(h)(1) (ii). Standard on Underground Construction. Hazardous classifications. Washington, DC: OSHA. Skinner, E.H. 1988. A ground support prediction concept: The rock rating (RSR) model. In Rock Classification Systems for Engineering Purposes. Edited by L. Kirkaldie. ASTM Special Technical Publication 984. West Conshohocken, PA: ASTM International. Travis, R.B. 1955. Classification of Rocks: Quarterly of the Colorado School of Mines, 50(1), January. Golden, CO: Colorado School of Mines. Ulusay, R., ed. 2015. The ISRM Suggested Methods for Rock Characterization, Testing and Monitoring: 2007–2014. Cham, Switzerland: Springer International. USBR (U.S. Bureau of Reclamation). 2001. Engineering Geology Field Manual, 2nd ed., Vols. I and II. Washington DC: U.S. Government Printing Office. USNCTT (U.S. National Committee on Tunneling Technology). 1974. Better Contracting for Underground Construction. Washington, DC: National Academy of Sciences. USNCTT (U.S. National Committee on Tunneling Technology). 1984. Geotechnical Site Investigations for Underground Projects. Washington, DC: National Academy Press. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 41 Risk Management I N TR O D U C TION Compared to aboveground construction, there are many more sources of potential risk and liability on underground projects. Complex construction sequences, generally linear construction paths, and subsurface conditions that can never be precisely known are just a few characteristics of underground construction that contribute substantial risk and liability. The risks include cost, schedule, safety, and overall project approvals. Regardless of the project delivery model, all the project participants (owner, designer/engineer, construction manager, contractor, and insurer) are exposed to some level of risk and liability throughout the entire life cycle of an underground project. The owner is the project participant with the most significant ability to influence timely, effective, and fair risk allocation and management. Generally, it is the owner’s responsibility to establish that project risk management will be required and to develop the risk policy and management procedures that will be used to address the specific risk conditions of a project as set forth in the Guidelines for Improved Risk Management on Tunnel and Underground Construction Projects in the United States of America (GIRM [O’Carroll and Goodfellow 2015]). The owner is the project participant with the most significant ability to influence timely, effective, and fair risk allocation and management (including the availability and terms of insurance coverage, as discussed in Chapter 13). The designer, construction manager, and contractor—who each have considerable practical and theoretical knowledge of risk processes, potential risks and mitigations, and risk management practices specifically for underground projects—should then collaborate with the owner in establishing the risk management procedures appropriate for the project at hand. This chapter reviews at a high level the typical risk management processes used on underground projects, discusses typical risks found in the risk register of an underground project, details the responsibilities of the parties for risk management, and further discusses the role of insurance industry recommendations in managing risk. The chapter Image courtesy of Andy Thompson, Metropolitan Transportation Authority Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 39 Chapter 4 40 concludes with an explanation of the owner’s leadership role in successful risk management and its importance to insurance availability. UN D E R S TA N D I N G RI SK The body of knowledge concerning project risk management is substantial and sufficient for routine use by owners, designers, construction managers, and contractors. To get the most benefit from the available tools, owners must begin their underground projects with attention to risk, setting the stage for designers, construction managers, and contractors to do the same throughout the project life. When the parties involved in underground construction understand risk and the ways it can be monitored and managed, these projects are more likely to be delivered within planned budgets and schedules. When the parties involved in underground construction understand risk and the ways it can be monitored and managed, these projects are more likely to be delivered within planned budgets and schedules. In this chapter, a project risk is defined as an uncertain event or condition that, if it occurs, has a positive or negative effect on project objectives (PMI 2017; ISO 31000). Risk is then quantified as the combination of the probability of the event occurring and the impact of the resulting effect (i.e., consequence). Other sources suggest different terms to describe this concept and the subsequent quantification of risk (e.g., GIRM) and merits might be seen in other approaches; however, in each case, it is recommended that the practitioner focus on the issue of uncertainty and associated impact of the uncertainty should it be manifested. Other terms that will be used herein are as follows: ■■ Uncertainty is the state of being unable to exactly predict an event or effect. ■■ Consequence is a measure of the effect of a project risk on one or more project objectives if it occurs; it can either be negative or positive. Positive consequences are usually called opportunities. Consequences can affect health and safety, cost, schedule, quality, or other project objectives. ■■ Probability is a measure of how likely or how often a project risk is expected to occur. ■■ Risk management includes the processes concerned with conducting risk management planning, identification, analysis, response (i.e., mitigation), monitoring, and control (PMI 2017). ■■ Residual risk is the risk remaining after response and/or mitigation are implemented. Most projects are riddled with uncertainty, and underground projects, involving construction in geologic materials, have more uncertainties. The following are some of the risks on underground construction projects: ■■ Cost and/or schedule risks to the owner ■■ Differing site condition risks ■■ Risk to the health and safety of workers and third parties ■■ Permitting, easements, and right-of-way risks ■■ Risk to the contractor for accidents, delays, loss of profit, bonding capability, labor availability and productivity, reputation ■■ Risk to third-party property, specifically existing structures and infrastructure Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Risk Management 41 ■■ Risk associated with the environment (e.g., pollution, damage to flora and fauna) ■■ Risks associated with political and public issues ■■ Risks for obtaining proper insurance coverage ■■ Difficulties in receiving funding ■■ Legal issues ■■ Labor and materials cost uncertainties given the long duration of these projects R I S K M A N A G EM ENT I S A PROCESS The success of project risk management depends both on the process used and the commitment, expertise, and experience of those involved. Following are the six basic steps in the risk management process: 1. Planning. Decide how to determine, implement, and execute risk management activities. 2. Identification. Identify potential risk events, causes, and triggers, and document their characteristics. 3. Qualitative analysis. Assess the probability and consequence of risks (relative scales) and prioritize them for future action. 4. Quantitative analysis. Perform detailed numerical analysis of risk probabilities and determine their consequences on project objectives (specifically cost and schedule). 5. Mitigation. Plan and implement specific actions to reduce either the probabilities or the consequences (or both) of identified risks. 6. Monitoring and control. Track identified risks and take actions to mitigate them; monitor residual risk, identify new risks, requantify existing risks, track the implementation of mitigation actions, and evaluate the effectiveness of actions taken. Risk Management Planning As early as possible during the project planning phase, typically during feasibility studies and before selection of an alternative, the owner should establish and communicate a risk strategy. This strategy should outline the owner’s risk tolerance and detail the risk management process and the tools it is adopting. No later than the start of alternatives selection, this should be documented in a formal risk management plan. The development of this plan may be delegated to consultants, but the owner remains accountable for overall project risk management during planning. The success of project risk management depends both on the process used and the commitment, expertise, and experience of those involved. When the contract documents are prepared for design-bid-build (DBB) projects, the requirements for risk management during construction should be incorporated for the contractor’s implementation. The contractor then becomes responsible for the construction-related risks as allocated in the contract documents. The owner retains or otherwise mitigates all other risks. For design-build (DB) projects, requirements for the design-builder to incorporate risk management into the final design and construction of the project must be likewise defined in the bridging documents (also called project definition documents). These are the Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 42 Chapter 4 documents the owner provides to the DB teams at the time of the proposal and which the teams use to base their proposals on. Throughout the remaining design effort and through construction, the design-builder and owner must collaborate in identification, characterization, and mitigation of risks. Whether all the risks are carried in one risk register or in two (i.e., one for the designbuilder and one for the owner) is not as important as ensuring the risks that each party is best able to mitigate and address are being tracked and responded to by the appropriate party. The level of detail in a risk management plan increases as the project progresses, but generally includes the following: ■■ Identify the risk management participants (i.e., the risk management team) and their expertise and responsibilities (e.g., different departments within the owner’s organization, consultants, designers, construction manager, contractors, cost estimators, schedulers, risk managers, risk facilitator, insurance agents, sureties). ■■ Describe the activities to be carried out at different stages of the project to achieve the project’s objectives. ■■ Describe the process to be used for documenting risks and their follow-up activities. Information about identified risks (including their nature, relevance, and significance) should be made available in a format that can be communicated to all parties. This is usually accomplished using a comprehensive and detailed risk register. ■■ Establish guidelines for confirming initial assumptions and documenting the current status of risk management efforts. ■■ Monitor documents as well as periodic audit review processes for compliance with project and risk management requirements. Based on the size, complexity, and risks associated with a given project, owners may wish to consider using individuals with specific project risk management experience and expertise in the role of risk workshop facilitator. Risk facilitators should possess not only a technical understanding of the project but also an ability to efficiently collect the necessary information for the risk management process. Facilitating efficient workshops with multiple stakeholders and disciplines present and discussing complex risk issues and scenarios, while all the while meeting workshop time constraints, are skills that successful risk facilitators must have. Risk Identification Following risk management planning, the identification of risks is the next risk management process. Risks are usually identified by bringing the selected risk management participants (the risk management team) together in a workshop setting (organized and run by the risk facilitator) to brainstorm what can go wrong. Sometimes other project stakeholders (e.g., utility owners or the community) also participate. The selection of participants at the initial risk workshop is a critical success factor for the risk process and for the project. Selecting these participants correctly enhances the data collected and leads to more effective planning and early design. Experienced personnel working on the project for the owner, designer, contractor, and construction manager are considered the first line of defense for the management of project risk. The workshop can be split into smaller subgroups to make sure the participants remain engaged in the process. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Risk Management 43 With a core group of design and owner agency management attending the entire one- or two-day workshop, these subgroups are commonly divided as follows: 1. Permits and right of way—consisting of all environmental, planning, permit agency staff (if necessary), and legal staff 2. Stakeholders—consisting of the same environmental team, planning, public outreach, community organization groups, and appropriate agency staff 3. Design and contracting—with the technical design team from all aspects of the project, agency staff, and procurement officers 4. Construction—technical design team, constructors if available or constructability consultants, along with experienced agency staff 5. Operations and maintenance—with the design team and agency operations staff to investigate The project risk register cannot take account of costs during the operational life of the tunnel. For this to be realized, the operations and maintenance (O&M) risk mitigations must be focused on activities during design and construction that help and minimize O&M activity and by inference will reduce the lifetime costs of the project. Development of an initial list of risks prior to the first workshop using generic risk checklists, performing a review of risks from past similar projects, and/or conducting one-on-one interviews with several key project stakeholders provides a good starting point for the workshop participants. Table 4-1 is a sample risk checklist for underground projects. In conjunction with identifying risks, the workshop should identify the likely causes or triggers of a risk. Risks should be clearly described with each risk description explicitly stating the uncertainty and its cause(s) and effect(s). The resulting risk register can identify the responsible party and the status. This facilitates the monitoring of remaining (residual) risks and periodic reevaluation of the effectiveness of the various mitigations. The risk identification section of a typical risk register includes the following: ■■ Risk identification –– Risk event number or identification –– Summary description of risk event –– Detailed description of risk event ■■ Risk trigger or cause –– Area affected –– Project outcome affected (e.g., cost, schedule, health and safety, environment, quality, third-party stakeholders) –– Phase of project affected (e.g., planning, design, construction, operations) Qualitative Risk Assessment After risks have been identified, the risk management team determines the probability (P) that a risk will materialize, or its expected rate of occurrence, and what its consequences (C) might be. Dependencies and correlations between risks also have to be considered. The combination of probability and consequence (P and C) indicates the relative level of risk and thus determines the priority of response. It should be noted that a consequence can also be positive, representing an opportunity for the project. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 4 44 TABLE 4-1 Risk checklist sample Potential Project Risks Project feasibility • Technical feasibility • Long-term viability • Political circumstances Funding • Sources of funding • Inflation and growth rates • Accuracy of cost and contingency analysis • Cash flow • Exchange rates Planning • Scope • Completxity of the project • Technical constraints • Third-party/community impacts • Right-of-way • Permits • Easements/staging areas • Agency coordination • Constructability • Risk allocation strategy • Project delivery method • Milestones (schedule) • Time to complete (schedule) • Synchronization of work and payment schedules Engineering • Design and performance standards • Reliability of data (especially geotechnical) • Adequacy of the geotechnical exploration and testing program • Complexity and completeness of design • Accountability for design • Appropriateness of general and special conditions • Implicit means and methods Type of contract Contracting arrangement • Owner managed • Design-bid-build • Design-build • Design-build-own-maintain • Construction manager at risk (CMAR) • Multiple prime contractors • Innovative procurement methods • Unfavorable contract clauses • Differing site conditions requirements • Hold-harmless provisions • No damage for delay • Force majeure losses • Quantity variations Construction • New, untried methods/requirements • Delays in mobilization • Unanticipated groundwater/geology/environment • Delay in delivery of tunnel boring machine (TBM) or other specialty equipment • High wear rates in cutters, equipment • Failure of TBM main bearing • Availability and reliability of power • Interfaces with adjacent or concurrent projects • Staging areas • Site access restrictions • Unforeseen utilities • Insurability of residual risks • Material and labor availability • Product quality • Community objections to methods/impacts • Start-up and commissioning Post-construction • Service life • Operations and maintenance Table 4-2 is an example of a key that correlates probability of occurrence of a risk to a rating (from 1 to 5) along with qualitative descriptions of each rating. Table 4-3 is a similar example key that correlates cost and schedule consequences to ratings and a qualitative description of the consequence. Sometimes other consequences such as safety, quality, perception, performance, environmental, and public impact are applicable and should also be considered. The severity of these other consequences can be difficult to quantify or correlate into a table, so the rating of these consequences is often highly subjective and qualitative. The values associated with cost and schedule in Table 4-3 should be scaled or fit for purpose based on the cost and duration of the actual project (e.g., a severity rating of “4” for a $30 million project is not the same as a severity rating of “4” for a $300 million project; likewise, a one-week delay on a six-month project is not the same as a one-week delay on a Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Risk Management 45 TABLE 4-2 Relative probability of occurrence key Rating, P Qualitative Description 1 Very unlikely Probability of Occurrence, % <5 2 Unlikely 5–20 3 Possible 20–50 4 Likely 50–75 5 Very likely 75–100 TABLE 4-3 Relative severity of consequences key Rating, C Qualitative Description Cost Impact, % of Construction Cost Schedule Impact 1 Insignificant <0.003 <1 week 2 Minor 0.003–0.03 1 week to 1 month 3 Moderate 0.03–0.3 1–2 months 4 Significant 0.3–3 2–6 months 5 Severe >3 >6 months TABLE 4-4 Risk response key Risk Rating, P x C Qualitative Description Risk Response 1–4 Negligible Accept 5–8 Tolerable Attention 9–12 Substantial Early attention 13–16 Very significant Unacceptable; mitigate 17–25 Intolerable Unacceptable; mitigate four-year project). This scaling process and the development of these relative probability and consequence keys should be discussed and accomplished in the risk management planning phase by the risk management team. The values listed for the cost impact are recommendations of a starting place for these discussions. Similarly, the schedule delay durations would be a good starting place for discussions regarding a project expected to have a construction duration of two to four years. After qualitatively rating each risk, the priority of risk response for each risk event can be obtained by multiplying the risk’s probability (P) and consequence (C) to obtain a risk rating. Table 4-4 is an example of a risk response key correlating risk rating with response and qualitative descriptions of each threshold. Some risks have very low probability but severe consequences. Although these risks might show up in the “tolerable” level in the risk action matrix, they should be given special consideration and may require specific risk management strategies. For example, consider a case in which there is a low probability (P = 1) that a tunnel boring machine would get stuck in squeezing ground, but the squeezing ground is in an area where the machine could not be accessed from above (C = 5). Although the probability is low, the consequences may be severe, and special mitigation measures may be required. The qualitative analysis process raises the awareness of all to the major risks and provides a structured method to prioritize these risks for further action and response. Table 4-5 represents an example of a qualitative risk register before any mitigation activities. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. VTA might follow a very strict prescriptive approach Overspecified requirements Disk cutters handling more time consuming than originally expected Procurement/ Commercial scope Quality/Health and Safety/ Environment (QHSE) Source: Saki et al. 2018 Construction Construction Potential combination of: • No room for contractor’s experience • Conflicts with contractor’s planned and estimated performance Construction Cutters handled in tunnel boring Accidents machine (TBM) cutterhead Construction Additional cost and delays Major unforeseen ground conditions Project execution Risk Materialization Phase Different ground conditions encountered from the ones assumed during preliminary engineering Additional cost Effect Federal requirements Cause/Trigger Tariffs/duties on non-U.S.-made goods Identified Hazard/ Identified Risk VTA VTA VTA Valley Transportation Authority (VTA) Risk Owner Phase and Owner Compliance/ Law/Regulation Main Category Definition Description 3 4 3 4 2 4 3 3 4 4 Nil 12 12 12 16 Risk Level Threat high Threat high Threat high Threat high Qualitative Assessment Before Controls/Mitigation Likelihood Time Impact Cost Impact Reputation Impact Health and Safety Impact Environment Impact Legal Impact Functionality (Quality) Impact Categorization Comments Ref 082 Risk Rating TABLE 4-5 Qualitative risk register before mitigation Item / ID 056 078 007 46 Chapter 4 Risk Management 47 Quantitative Analysis Quantitative risk analysis involves detailed numerical methods (e.g., Monte Carlo simulation, decision tree analysis, event tree analysis, fault tree analysis; see Sander et al. 2016) to quantify the probabilities and consequences of risks. These methods are now widely used to address risk for complex underground and infrastructure projects. (See, e.g., Isaksson 2002; Isaksson et al. 1999; PMI 2017; Grasso et al. 2002; Sander et al. 2016.) Methods analyzing cost and schedule are the most commonly used for underground projects. Cost. Quantitative cost analysis is used to quantify an owner’s and/or project’s cost risk exposure. Its most useful application is in developing contingency or allowance budgets for projects or programs. Traditionally in the heavy civil construction industry, what has been supplied to the owner is a single point dollar amount, based on a percentage of the estimated construction cost (e.g., 5%–10%) as a suggested contingency. This is essentially the proverbial shot-in-the-dark approach. It may work on a simple trenched pipeline construction project, but probably will not be appropriate for a complex, large-diameter, urban tunnel project. From the owner’s perspective, the trouble with the fixed percentage is that it fails to answer the question “How confident am I that x% contingency will be sufficient to address issues that arise related to risk events?” The quantitative cost–risk analysis mathematically characterizes the range of uncertainties associated with risks using a numerical simulation model. The advantage of this analysis is that it combines each risk’s likelihood of occurrence with its full range of possible cost impact along with a measure of the owner’s contractual share of that cost impact. The following are recommended steps for performing a quantitative cost–risk analysis: 1. The existing risk register is reviewed to identify risks with cost impact consequences. 2. Risk management personnel work with project stakeholders to identify and establish a cost impact team of specialists (including cost estimating staff). 3. In a workshop facilitated by risk management personnel, this team quantifies the probabilities of each risk event and the range of possible cost impacts should a given risk event occur. The probabilistic distribution of cost impact for each risk collectively forms the basis of the numerical simulation model. 4. The group then determines if contractually each risk’s consequence would be the full responsibility of the owner or if this risk is shared with others (i.e., the contractor or insurance). 5. Correlations between risk events are also considered and included in the analysis. 6. Following the workshop, using software such as RIAAT by RiskConsult or @Risk by Palisade Software, a Monte Carlo simulation analyzes what-if scenarios (typically between 10,000 and 100,000 probabilistic simulations) of possible risk occurrences and impacts of the risk events. The multitude of probabilistic iterations will inevitably model the dream project, the nightmare, and everything in between, allowing the owner to see the full range of possible cost impacts. One of the technique’s greatest strengths is its effectiveness in communicating the results. It uses a cumulative distribution curve to graphically illustrate the range of total cost risk the owner faces along with a table presenting confidence interval values. An example is shown in Figure 4-1, showing the risk cost on the x-axis and the confidence level on the y-axis. This curve helps the owner and other project stakeholders establish a budget contingency based on their risk tolerance level. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 4 48 Total Project Risk Cost 21.17 90.0% 5.0% 1.0 Statistics Total Project Risk Cost 5.36 5.0% 0.8 0.6 0.4 0.2 0.0 0 5 10 15 Values in Millions 20 25 Cel Minimum Maximum Mean Mode Median Std Dev Skewness Kurtosis Values Errors Filtered Left X Left P Right X Right P Dif. X Dif. P 1% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 30 95% 99% Model Input!O84 835,114.01 65,745,153.52 11,866,252.60 9,588,445.50 11,042,727.28 4,985,770.07 1.1599 5.6800 100000 0 0 5,359,483.68 5.0% 21,168,509.69 95.0% 15,809,026.01 90.0% 3,747,190.83 5,359,483.68 6,368,673.08 7,107,452.98 7,755,979.97 8,329,317.67 8,889,870.76 9,427,988.35 9,956,328.82 10,494,356.45 11,042,727.28 11,618,959.93 12,246,568.96 12,906,225.72 13,651,435.28 14,494,235.83 15,480,291.87 16,706,922.93 18,361,949.09 21,168,509.69 27,371,394.31 Courtesy of Schnabel Engineering FIGURE 4-1 Cumulative distribution curve of cost impacts For tunnel projects, it is common to choose a confidence interval of 75% to 90%, depending on the size and complexity of the project. That is, budget enough contingency dollars to cover 70% or 90% of iteration outcomes. This money can be carried in different ways, such as in a general project contingency, by allowances for specific risks listed as bid sheet items, and/or as a separate management reserve (i.e., not listed in the contract). Although the risk management team can supply recommendations in the form of the confidence curve, the decision of how to carry contingency money and the amount that is appropriate is ultimately up to the owner, after review of budgeting considerations, authorization protocol, and the time required to obtain further funding after the construction contract award. Until recently, budgetary contingency amounts for nearly all tunnel projects were developed using historical data (i.e., the shot-in-the-dark approach). However, quantitative cost analysis (e.g., by the Monte Carlo method) is becoming more common each year. The quantitative cost–risk analysis can also be used during the construction phase to help owners better manage tunnel projects. The goal of the analysis during construction is to quantify any newly identified risks, update the existing cost impact model based on ongoing monitoring and evaluation of the effectiveness of mitigation measures and current construction progress, and keep track of expected and risk-based cost at completion. These updates can also include an analysis of reduced contingency during construction. Such an analysis recognizes money spent on specific previously identified risks, and on new risks that were not previously identified or anticipated. It also allows the owner to zero out allowances for risks that did not happen (and will not happen), thus freeing up additional contingency dollars for the remainder of construction. The extension of the risk management effort into the construction phase can help owners better understand their current risk exposure and help track the current contingency spending and available balance given previously identified residual risks and potential future risks events. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Risk Management 49 Schedule. Quantitative schedule analysis is a similar probabilistic model simulation that provides numerical ranges of potential schedule impacts resulting from the occurrence of identified risk events and the variability in duration of key schedule activities. The following are recommended steps for performing a quantitative schedule risk analysis: 1. The existing risk register is reviewed to identify risks with a schedule delay consequence. 2. In the most current project schedule, key activities are identified. These might include activities with long durations, activities on or near the critical path, activities susceptible to a large variation or uncertainty in duration, and/or activities with unrealistic or overly conservative durations currently estimated, as well as the sequencing of construction activities. 3. Risk management personnel work with project stakeholders to identify and establish a schedule impact team of specialists (including scheduling staff). 4. The group assigns minimum, most likely, and maximum durations (in work days) for key schedule activities. 5. In a workshop facilitated by risk management personnel, the team quantifies the probabilities of each risk event occurring and the range of possible delays or time reductions (in work days) should a given risk event occur. The probabilistic distribution of schedule impact for each risk collectively forms the basis of the numerical simulation model. 6. The group then assigns risk events to the appropriate schedule activities that they would affect. 7. Following the workshop, utilizing schedule simulation software such as Primavera Risk Analysis software by Oracle or RIAAT, a Monte Carlo simulation analyzes what-if scenarios (typically, 2,000 to 100,000 probabilistic simulations) of possible risk occurrences and impacts of the risk events. The quantitative schedule analysis and its resulting cumulative distribution curve graphically illustrate the range of potential completion dates resulting from the simulations. An example is shown in Figure 4-2. These curves can be generated for project completion date, but also for key milestone or activity completion dates. This curve gives owners and other project stakeholders an understanding of the confidence level that select activities, milestones, or the entire project will be completed on time. The software also allows the user to perform a sensitivity analysis to identify which activities have the most influence on the project completion date (or other key milestone date), and thus owners can use the results to focus mitigation measures and resources to minimize key milestone and/or total project schedule delays. Cost and schedule risk analyses can be integrated to facilitate decisions that include uncertainties. Such an integrated model helps to select the most economic project alternative. For example, for phase II of the Bay Area Rapid Transit (BART) Silicon Valley project, the cost and completion dates for two alternative projects were compared in an independent risk assessment (Saki et al. 2018). This process provided the owner with a comprehensive decision-making basis using comparative risk profiles for two tunneling alternatives: a single large-diameter tunnel (SB) versus two smaller twin tunnels (TB). Construction and system risks were qualitatively assessed and quantified per cost (Figure 4-3) and time (Figure 4-4) to compare the cost and duration of the two options, including the differences in O&M Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 4 50 Forecast: Conveyance System Complete Frequency Chart 5,000 Trials 4,868 Displayed 50% confidence .030 150 75% confidence .023 112.5 .015 75 .008 37.5 .000 0 1/5/2011 5/30/2011 10/22/2011 3/15/2012 Frequency Probability 25% confidence 8/7/2012 Date Courtesy of Bill Edgerton and Diane Dwire FIGURE 4-2 Probabilistic distribution curves of completion dates Relative Frequency 12% Delta P80 $ 518 M Construction Risk Cost SB Construction Risk Cost TB 10% 8% 6% 4% 2% 0% 0 150 300 450 600 750 900 1,050 1,200 1,350 1,500 1,650 1,800 1,950 2,100 2,250 2,400 Cost in $ Million Source: Saki et al. 2018 FIGURE 4-3 Construction cost for two alternative projects using risk-based decision-making Relative Frequency 12% Delta P80 293 days SB Completion Date Heavy Civil TB Completion Date Heavy Civil 10% 8% 6% 4% 2% Completion Date Source: Saki et al. 2018 FIGURE 4-4 Completion dates for two alternative projects using risk-based decision-making Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 20 29 07 /0 1/ 20 28 4/ 09 /0 27 7/ 20 28 /0 04 /2 0 09 27 /2 0 09 11/ 27 11/ 27 /2 0 /1 2 06 /2 0 01 /1 3 20 26 /1 6/ 08 20 26 03 /1 9/ 20 20 / 10 / /2 05 25 02 5 3/ 2 20 24 24 / 12 / 07 /2 7/ 2 02 4 0% Risk Management 51 costs for the first 30 years of operation. Such a validated approach has set the stage for future risk-based project evaluations. Risk Mitigation Risk mitigation involves identifying and implementing actions that will reduce a risk’s probability of occurrence or severity of consequence, or both. The overall goal of any risk mitigation approach is to reduce the effects of a risk (if it might materialize) to a level as low as reasonably possible. Common strategies for mitigating risks are as follows: ■■ Avoid. Change the project plan to eliminate the risk or protect project objectives from being negatively impacted. This is always the most effective way to control a risk. ■■ Reduce. Implement an action to reduce the probability and/or severity of a risk. In many cases, this is the only available option. ■■ Transfer. Channel the consequence of risk by trying to allocate all or part of the risk contractually either to the contractor or to another party such as an insurance carrier. ■■ Accept. Do not proactively respond, but prepare to deal with the risk if it eventually materializes. However, keep monitoring the risk in case it changes and a response becomes necessary. The contract establishes and communicates risk allocation and must define which party is responsible for dealing with each specific risk. This allocation will impact cost, schedule, and quality. As discussed previously, the recommended policy is to allocate risk to the party that has the most effective control over it. Because an ambiguous allocation of risk is often a leading cause of construction disputes, the determination of risk allocation needs to be made objectively, and allocation must be clear in the contract documents. Table 4-6 shows a simplified example of typical risk allocation. TABLE 4-6 Simplified typical risk allocation Risk Party Normally Assuming Risk How Risk Is Assigned or Managed Site access Owner Mitigated via advanced planning and site acquisition. Temporary work and staging areas Contractor Assigned via contract clauses. Geotechnical site conditions Owner Mitigated via adequate geotechnical investigations and contract clauses, geotechnical data report, geotechnical baseline report. Means and methods Contractor of construction Owner Assigned via specific contract clauses. Mitigated via specifications that may restrict means and methods (see Chapter 5 for discussion of prescriptive vs. performancebased specifications). Settlement of Owner adjacent structures Contractor Mitigated by designing and specifying building protection measures and instrumentation for monitoring and responding to data in detail. Assigned via specific contract clauses. Weather Shared Assigned via contract clauses. Contractor assumes risk of normal weather events. Owner assumes risk of above-normal events. Force majeure Owner and/or Contractor Allocated by contract clauses, and the owner’s portion mitigated via contingency reserve and/or insurance. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 52 Chapter 4 To reduce the overall impact to the project and owner, each risk should be assessed individually to determine to whom it should be allocated. The bid documents should clearly convey the risk allocation. The practice of allocating all, or nearly all, the risk to the contractor is counterproductive, as it frequently leads to increased costs and delays to the owner through inflated bid prices, disputes, claims, and litigation. Risk Monitoring and Control All of the steps in risk management are important, but perhaps the most important (and possibly the easiest to overlook) is the consistent monitoring of the results of risk management decisions, particularly the effectiveness of mitigations. A detailed risk register is the best way to monitor risk management decisions. The example depicted in Table 4-7 is an extension of the risk register shown in Table 4-5, illustrating mitigation strategies and residual risks. USE O F TH E R ISK REGI STER I N PROCU REMENT In the United States, the typical practice for DBB projects is to use the risk register, prepared by the owner and its consultants during the design phase (or earlier) to identify mitigations. If a mitigation requires allocating risk to the contractor, language is placed in the contract to that effect. Some owners provide the risk register to the contractor during bidding or after contract award, and others do not. It has been argued by some (e.g., Goodfellow and Mellors 2007) that it is appropriate to issue the risk register to the bidders so that all bidders know who is responsible for specific risks, and bids are based on uniform risk allocation. Proponents also argue that issuing the risk register to bidders would ensure a common understanding of the identified risks, share the benefits of the owner’s investigation with the bidders, help bidders price risks appropriately, and ensure that risks allocated to the contractor are priced within a competitive environment. Opponents argue that including the risk register with the contract documents could affect the risk allocation established in the contract documents, result in increased change orders, and subsequent interpretation of the risk register by a dispute adjudicator based on contract law principles and case law. Moreover, say opponents, if the mitigation of each risk is properly addressed and communicated in the contract documents, there is no need to include the risk register in the contract documents. Because of these differences of opinion, for projects using the DBB delivery method, currently the industry makes no explicit recommendation as to whether the risk register developed during design should be communicated to the bidders. It is noted that best-value, negotiated procurement, and other contracting approaches include mechanisms to allow the risk management processes and risk allocation to be communicated and evaluated between the parties and changed during or after the bidding phase. This approach, along with a discussion of identified risks in the risk register during the negotiation process, may achieve some positive results as previously discussed. If the bid prices are high because of particular known and unknown risks assigned to the contractor that are difficult to quantify with confidence, the owner may elect to share or be responsible for the risk to achieve a less risky and equitable approach to both parties. This allows a measure of protection for the contractor and a lower overall cost for the owner. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. P= Personnel/Staff O = Organization T = Technology S = Strategy/System/Substitution 3 2 OP Yes ST Yes OP Accept Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Source: Saki et al. 2018 Mitigate Combination of: • Reaching out to tunnel boring machine (TBM) manufacturer(s) to work out this issue during design of TBM. • Investigate TBM manufacturers on use of realtime monitoring of main bearing. • Reduce required hyperbaric interventions to absolute minimum (emergencies only). • Monitor cutters in real time. • Plan for contingencies to handle combination of worn-out/blocked cutters. • Plan for contingencies to handle obstructions. • Back loading cutters • Specific devices for cutter handling • Proper training Educate Valley Transportation Authority (VTA) in time. 2 System Safety Mitigate Carry out supplementary staged site investigations. OP Yes Realization 3 Likelihood OP Yes Mitigate Combination of: 1. Minimize use of material subject to tariffs/ duties on non-U.S. goods. 2. Ask for waiver well ahead of time. Strategy (Combinations of) Measures/Controls: Apply a Safety System (e.g., by “STOP”) to Achieve System Safety Risk Control/Mitigation Time Impact 1 3 Cost Impact 2 2 3 Health and Safety Impact 3 By design-bid-build (DBB) per VTA’s and Aldea’s decision By design-bid-build (DBB) per VTA’s and Aldea’s decision By design-bid-build (DBB) per VTA’s and Aldea’s decision By design-bid-build (DBB) per Valley Transportation Authority (VTA)’s and Aldea’s decision Comments Residual Risk Functionality (Quality) Impact TABLE 4-7 Qualitative risk register after control implementation Risk Rating 6 6 6 9 Threat medium Threat medium Threat medium Threat medium Risk Level PM PM PM PM Action Owner Part of preliminary engineering after system decision Part of preliminary engineering after system decision Part of preliminary engineering after system decision Part of preliminary engineering after system decision Milestone Target Date Controlling Planning Planning Planning Planning Status Risk Management 53 Legal Impact Environment Impact Regulation Impact Chapter 4 54 RE S P O N S I B I L I TI ES OF TH E PARTI ES F OR R ISK MA NA G EMENT Owners, design consultants, construction managers, and contractors all have specific responsibilities in the risk management process. Table 4-8 summarizes the process in greater detail and shows the responsibilities of each party at various stages of a project. IN S U R A N C E C OD ES OF PRACTI CE Insurance practice codes are used by many insurers on major underground projects to define and mandate practices that must be employed in the planning, design, and construction processes. Compliance with these codes may be a condition of insurance coverage, and this is a relatively new and controversial development. It is therefore useful for owners, as the project participants with the best ability to influence risk allocation and thus the terms of insurance coverage, to understand the history and requirements of current insurance codes of practice. In October 2001, the Association of British Insurers (ABI), representing insurers and reinsurers in the London insurance market, expressed its increasing concerns to the British Tunnelling Society (BTS) about losses on tunneling projects. The ABI advised the BTS that, rather than withdraw entirely from providing insurance on tunneling projects or significantly restricting coverage scope—options traditionally exercised by the insurance industry when faced with similar concerns—it would work collaboratively with the tunneling industry to develop a joint code of practice for the improved management of risk on tunneling projects. This initiative led to the September 2003 publication of the Joint Code of Practice for Risk Management of Tunnel Works in the UK (BTS and ABI 2003), which was followed by A Code of Practice for Risk Management of Tunnel Works by the International Tunnelling Insurance Group (ITIG 2012). As a follow-on to these documents, GIRM was released in 2015 (O’Carroll and Goodfellow). GIRM was not intended to be another code, but rather a document that describes best practices for managing and reducing risks in U.S. tunnel and underground projects. In today’s reality, improved contracting practices are starting to align with new insurance underwriting approaches for major underground projects, a convergence that focuses on factors and considerations significantly beyond the purely technical design and construction issues and includes the evaluation of the qualifications and experiences of the engineering and construction firms. See Chapter 13 for a discussion of insurance. Owner Leadership Is Required for Successful Risk Management Engineers and contractors, and those who advise them, have long recognized the critically important decision-making role of the owner in the planning, contracting, and management of underground projects. That prominent role of the owner, the choices it makes, and how those choices affect—positively and negatively—project risk materialization and the resolution of disputes has, until relatively recently, failed to get the attention of the insurance industry’s underwriting. With this new awareness, however, have come some significant changes in the underwriting and availability of project insurance on underground projects. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Risk Management 55 TABLE 4-8 Risk management responsibilities by project phase Phase Owner (+ Consultants) Contractor Planning and early design • Establish risk policies and procedures. • Develop and initiate project risk management plan. • Establish risk acceptance criteria. • Establish applicable codes of practice. • Determine appetite for risk, balance of risk to reward. • Initiate risk identification workshops to identify and rank risks (qualitative analysis). • Develop initial project risk register; rank and review risks for initial action. • Identify initial risk mitigation strategies. • Evaluate insurance options. • For design-build projects, define the processes for risk management in the request for proposal (RFP) and bridging documents. • No responsibility in this phase. Final design • Update risk management plan. • Update risk register and further substantiate qualitative analysis. • Perform quantitative risk analysis. • Consider success-critical (higher-ranked) risks for mitigation. • Determine risk mitigation options. • Evaluate and implement initial risk mitigation actions. • Prepare a list of risks for bidding/contract negotiation and/or award. • Write contract documents (e.g., plans, specifications, RFPs) that capture all applicable mitigation actions from the most current risk register including the unambiguous allocation of project risks to the contractor, owner, and others. • For design-bid-build: no responsibility. • For design-build and similar delivery methods (such as construction manager at risk [CMAR], alliancing, and others): joint responsibility, consistent with the owner’s risk management plan and contractual requirements—generally, the activities shown in the “Owner” column. Bidding • Respond to contractors’ questions regarding risk definition, quantification, potential mitigation measures, and allocation. • Revise contract provisions if needed. • Review contract provisions. • Prepare risk mitigation plans as required by bidding requirements. • Evaluate risk mitigation approaches. • Use risk allocation established in contract documents for pricing. Award • If contractor’s risk management plans are required as part of the contract award evaluation (e.g., best-value procurement), evaluate these plans prior to award. • Award contract. • Respond to owner regarding any risk issues. (continues) Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 4 56 TABLE 4-8 Risk management responsibilities by project phase (continued) Phase Construction Owner (+ Consultants) • Manage construction and verify that the contractor’s risk management plan is being implemented in accordance with the terms of the contract and applicable codes. • Manage/update the owner’s risk management plan, including assessing whether the owner’s risk remains consistent with the construction conditions, contract requirements, and established guidelines. • Update insurance provisions as necessary. • Manage/mitigate risks that are not the responsibility of the contractor. • Identify/mitigate new risks outside the responsibility of the contractor or third parties. • Monitor and evaluate the effectiveness of mitigation measures and any residual risks. • Update quantitative cost analysis, as required, to update the contingency drawback curve and expected cost at completion. • Perform quantitative analysis of schedule impacts, as required, to update expected date of (substantial) completion(s). • Monitor and control risk. Contractor • Implement the risk management plan as necessary, including detailed risk assessments (with owner and consultant participation where necessary). • Maintain and update the project risk register. • Document actions taken. • Implement risk mitigation directly (or with others if necessary). • Evaluate means and methods and construction sequencing on mitigation measures and residual risks if any. • Maintain required insurance. CO N C LU S I O N S AND RECOM M END ATI ONS The identification and management of risk is a fundamental, success-critical project requirement for which the owner must take primary responsibility. For all delivery methods, it is necessary to consider risk strategies as early in project planning as possible and continue risk management activities throughout the entire life cycle of the project. Risk management activities include risk management planning, risk identification, analysis, mitigation, and monitoring and control. Communication and collaboration between the parties on risk management issues and mitigations, establishing a rigorous risk management monitoring plan, and frequent and ongoing check-ins to discuss the health and effectiveness of mitigation measure for all risks to avoid surprises are key to controlling project risks, relationships between the parties, and cost and schedule. For the full benefit of a risk management program to be realized, it must be fully integrated into project management and project control functions alongside cost and schedule controls and must not be considered a bolt-on activity. Insurance on major underground projects is an essential component of an effective risk management program. The availability, terms, scope, and premium cost of such insurance are critical factors influencing, if not determining, many go-no-go decisions on major underground projects, such as whether the project will proceed at all, whether engineers and contractors will be willing to participate in the project and, if so, what degree of risk assumption/allocation they will accept. Recognizing that many of the influencing factors underlying insurance availability also represent risks for primary project participants, it is Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Risk Management 57 highly recommended that owners apply many of the improved contracting practices to the planning, design, and construction stages of any major subsurface project. ■■ Recommendation 4-1: Project owners and their consultants should address, at the very beginning of planning, the uncertainty associated with underground projects. Owners should select and require all partners to use a comprehensive and documented risk planning, identification, mitigation, monitoring, and control process. ■■ Recommendation 4-2: Risks should be allocated to the parties that are in the best position to control them. Risk allocation should be clearly identified in the contract documents so that the appropriate cost for controlling the risk is included in the bid price. ■■ Recommendation 4-3: In quantifying cost impacts of risk events for underground projects, particular attention should be given to accounting for associated high cost of schedule delays, which are often a result of the large value of the equipment spread and the high velocity of cash flow. ■■ Recommendation 4-4: The risk management process should continue throughout the life of the project, from planning through design and construction, with risks documented and managed to the extent possible with the tools available during each phase of the project. Rigorous ongoing monitoring of all project risks and evaluation of mitigation measures should be performed, regularly determining the status of a particular risk as well as any resultant residual risk. Risk registers should be continuously updated, and the effectiveness of mitigations should be assessed periodically, focusing on forward-looking mitigation of upcoming risks. ■■ Recommendation 4-5: Owners should investigate the relationship between their risk management efforts and their insurance carrier. Risks that are covered by insurance will likely have a significant impact on premium costs, key project decisions, and how the project is designed. ■■ Recommendation 4-6: Schedule uncertainty should be evaluated in providing a clear understanding of the risks on a project. This knowledge would inform the owner and other project participants as to likely completion dates and the impact of not mitigating schedule risks to the project. R E FE R E N C E S BTS and ABI (British Tunnelling Society and Association of British Insurers). 2003. Joint Code of Practice for Risk Management of Tunnel Works in the UK. London: BTS. Goodfellow, R.J.F., and Mellors, T.W. 2007. Cracking the code: Assessing the implementation in the United States of the Codes of Practice for Risk Management of Tunnel Works. In Rapid Excavation and Tunneling Conference: 2007 Proceedings. Edited by M.T. Traylor and J.W. Townsend. Littleton, CO: SME. pp. 12–20. Grasso, P., Mahtab, M., Kalamaras G., et al. 2002. On the development of a risk management plan for tunnelling. In AITES-ITA Downunder 2002: 28th ITA General Assembly and World Tunnel Congress. Sydney: Australian Tunnelling Society/Engineers Australia. Isaksson, M.T., Reilly, J.J., and Anderson, J.M. 1999. Risk mitigation for tunnel projects—A structured approach. In Challenges for the 21st Century: Proceedings of the World Tunnel Conference. Rotterdam, The Netherlands: A.A. Balkema. pp. 703–712. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 58 Chapter 4 Isaksson, T. 2002. Model for estimation of time and cost, based on risk evaluation applied to tunnel projects. Ph.D. thesis, Division of Soil and Rock Mechanics, Royal Institute of Technology, Stockholm, Sweden. ISO 31000. 2009. Risk Management—Principles and Guidelines. Geneva: International Organization for Standardization. ITIG (International Tunnelling Insurance Group). 2012. A Code of Practice for Risk Management of Tunnel Works. Châtelaine, Switzerland: International Tunneling and Underground Space Association. O’Carroll, J., and Goodfellow, B. 2015. Guidelines for Improved Risk Management Practice on Tunnel and Underground Projects in the United States of America. Report of the Underground Construction Association Division of SME. Englewood, CO: SME. PMI (Project Management Institute). 2017. Risk management. In A Guide to the Project Management Body of Knowledge: PMBOK Guide, 6th ed. Newtown Square, PA: PMI. Saki, S.A., Brady, J.J., Goodfellow, R.J.F., et al. 2018. Bart Silicon Valley (BSV) Phase II, tunneling methodology—comparative analysis independent risk assessment. In North American Tunneling: 2018 Proceedings. Edited by A. Howard, B. Campbell, D. Penrice, et al. Englewood, CO: SME. pp. 596–605. Sander, P., Reilly, J.J., and Moergeli, A. 2016. Risk management—Correlation and dependencies for planning, design and construction. In World Tunneling Congress (WTC) 2016 Proceedings. Englewood, CO: SME. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 51 Design I N TR O D U C TION The design of an underground project establishes the road map for every aspect of the project—from how it is procured and priced to how it is constructed. This being the case, an exhaustive discussion of all the design issues that affect contracting practices in underground construction would fill an entire volume. However, to better understand underground contracting practices in the United States, it is advantageous for owners and contractors to be aware of the general scope of the designer’s responsibilities. This chapter provides a general overview of the many critical roles that underground engineers play in preparing contract documents. Along with the owner’s planning staff, the design team is one of the key players during the planning phase of an underground project (see Chapter 2), particularly in determining the feasibility of the project and either leading or playing a significant role in the development of environmental documentation required under the National Environmental Policy Act of 1969 (NEPA) or similar state-specific regulations. The designer’s role in final design is to further develop the design, prepare deliverables (design documents), and control the quality of those deliverables to ensure that they meet the standard of care in the industry, thus maximizing value to the client/ owner and the ultimate users, often the public. Design services during construction are an important element in most aboveground and underground construction projects. With underground projects, the verification that actual subsurface conditions are as expected is a key reason for the designer to provide construction support. The designer’s role in providing this construction support and assisting in the testing and commissioning phases is covered later in this chapter. D E LI V E R Y M ETH OD S Alternative delivery methods are covered in greater detail in Chapter 10, “Contracts.” This chapter focuses on the traditional design-bid-build (DBB) method, and the evolving design-build (DB) method, specifically as they affect the roles and responsibilities of the Image © Fulcher/Elioff Collections Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 59 Chapter 5 60 design team. For more insights into specific differences between the design for DBB projects and that used for DB projects, refer to chapter 7 in Brierley et al. (2010). Standards for the level of effort required of the design team on DB projects do not yet exist. The level can significantly vary depending on both the owner’s and the contractor’s expectations and may not match anything that the owner’s or contractor’s designer has experienced on past projects. In addition, to demonstrate that the final design meets the established criteria, the final designer will likely be required to produce more work products (e.g., reports, investigations, and calculations) beyond just what the contractor needs to complete the construction (Felice 2018). Thus, to ensure that the design-builder includes a sufficient level of effort for the design team, the owner (through its program manager or consultant) must include in the solicitation documents a detailed scope of work for the design process. This scope should include the required studies, evaluations, calculations, interdisciplinary reviews, comment review meetings, work plans, quality reviews, meetings, constructability reviews, support of cost estimates, and the multiple design submittals necessary to advance to issued-for-construction documents. In addition, the owner’s expectations must be clearly set forth as to the DB design team’s presence during construction, in the form of submittal review, instrumentation evaluation, and record drawings. IN I TI A L D E S I G N Design usually begins with an understanding of the basic function of the project and requirements and then proceeds to conceptual design and preliminary design. By the end of preliminary design, alternative solutions and/or alignments have been evaluated and a preferred solution established, along with its schedule and budget. The project delivery method (see Chapter 10) will establish when final design can begin. For underground projects, and in particular tunnel projects, these early design efforts are key. Major costs and schedule duration are estimated based on limited geotechnical information and the ability to acquire subsurface easements and staging areas, protect structures, and gain community acceptance. These design components (to name a few) require a lot of time to develop. Like other linear projects (at-grade and aerial), tunnels require alternatives analysis that considers the route and impacts to existing conditions. Unlike surface or aerial alignments, however, the design of a tunnel requires assessing subsurface alternatives that will likely have limited information concerning geologic and groundwater conditions, soil and groundwater contamination, and the presence of unknown or undocumented existing underground structures. All of these factors can significantly increase the cost of a project. A tunnel project is often preferred for long-term benefits and reduced construction impacts. The benefits include minimal visual and noise impacts, reduced operational and maintenance cost, enhanced durability, and improved property values where the tunnel replaces an aerial or at-grade facility. However, the initial cost of construction may also outweigh the long-term benefits. This is partially caused by the difficulties in assessing the impact of increased property values (and associated tax revenue), particularly around underground transportation projects, as well as life-cycle cost benefits specifically associated with gravity flow versus pumping facilities on water/wastewater projects. These factors can be significant and could influence the alternative selection process. It is recommended that they be considered in the evaluation of alternatives where underground solutions are technically feasible (Parker 2007). Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Design 61 D E S I G N D E V EL OPM ENT Design deliverables are generally submitted for review at 30%, 60%, 90%, and 100% completion. Sometimes preliminary design ends in the production of a 30% design deliverable, and at other times, the 30% deliverable is the first submittal in the final design, incorporating results of value engineering (see the section “Value Engineering”) or other owner decisions and external/political influences that have shaped the project up to that point. Although some owner agencies have different criteria for what is developed in the design stages, activities are generally similar as discussed in the following sections. Thirty Percent Design At this stage, the basic design concepts and assumptions are defined, and the suitability of available information is evaluated. Because so much of an underground project design depends on the ground conditions, a draft basis of design technical memorandum, draft geotechnical interpretive report (GIR), draft geotechnical data report (GDR), environmental assessments, a list of the specifications, and draft plan sets should be prepared. (For more information on the GIR and GDR, see Chapter 3.) The basis of design memorandum should summarize the required design performance (e.g., hydraulic capacities for water/ wastewater projects and customer volumes for transportation projects) in the form of technical criteria and assumptions, code interpretations and permit requirements, right-of-way needs, personnel access and egress, and maintenance considerations. The plan sets should include a drawing index; a process schematic (if applicable); site plans and vicinity maps; site and utility plans; and drawings showing the location and footprints of proposed structures, including finish floor elevations, preliminary site grading concepts, alignment, plans and profiles of tunnels and pipelines, identification of necessary property acquisition, required utility relocations, preliminary opening sizes to enable verification of space allowed, foundation and support schematics to establish compliance with geotechnical conditions, and general arrangement drawings for mechanical and electrical equipment. Elements that the contractor will be responsible for designing should be identified at this stage. Complex projects are now commonly prepared using building information modeling (BIM), a three-dimensional (3-D) digital representation of physical and functional characteristics of a facility, which can be used to issue two-dimensional (2-D) drawings. The 3-D models offer major advantages for space planning and reducing conflicts between design disciplines. And these advantages are well known within the industry. Underground projects are often designed with both temporary and permanent ground support systems. Advantages of BIM are even more significant as the temporary support can be modeled along with existing utilities, the permanent structure, and phases of construction during installation of support of excavation (Figure 5-1). The 3-D BIM models have now been extended to include the fourth dimension of time and the fifth dimension of cost (Venturini et al. 2018). These extended models have the potential to greatly reduce the time and effort required to produce quantity takeoffs and cost estimates. The requirements for BIM use in contract specifications for design should also include turnover of as-built design files for use in operation and maintenance of the facility as well as the expectations of sharing the model, 3-D data, and other electronic files with the DBB contractor or DB designer/ contractor team. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 5 62 Courtesy of McMillen Jacobs Associates FIGURE 5-1 Building information modeling The 30% design stage is often the stated level of design at which owners issue requests for DB proposals. The actual level of design will vary depending on the complexity of the project. For example, a complex metro station may be taken to a more complete design than a relatively straightforward sewer tunnel, as prospective design-builders for the station must have sufficient information to prepare cost and schedule proposals within the given time frame for final design and construction. Another reason that the owner’s design may have to be advanced is to incorporate coordination with third parties, typically other agencies having jurisdiction of portions of the work, such as protection and relocation of utilities. These agencies should have reviewed the environmental documentation and have knowledge of the project, and in-principle agreements should be in place with the project’s owner agency. Utility relocation is a factor on many underground projects, although in some cases, there may be less relocation necessary because a tunnel could be designed to go under the existing utilities. Nonetheless, where access through public rights-of-way is required for construction (e.g., for subway stations), the utilities must be rerouted to facilitate construction activities. Utility relocation design must begin in early design (30%) and will likely continue through final design. The designer must do extensive research and coordinate closely with utility agencies early in the process to locate the latest utility plates, field verify the locations of major utilities, and accurately plot the locations of the utilities. When preparing utility service/relocation plans, designers should attend to both the accuracy of the information (quality) and its completeness (quantity). This stage is also an opportunity to evaluate potential impacts to aging utilities passing above or adjacent to excavations— whether they will be proactively replaced or monitored, and how they will be inspected, documented, and monitored. Existing utilities and their location, conditions, and relocation have been sources of many differing site condition claims on underground construction projects. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Design 63 The responsibility of the project to pay for the relocation or replacement of a utility should also be investigated at the earliest stage possible as the financial impact to the project may influence the configuration and footprint of facilities. Finalizing and executing utility relocation agreements can take longer than the entire design process, depending on the extent of the relocations and the relationships between the agencies. Accurate existing utility information should be incorporated into the plans and specifications using industry standard practices set forth in CI/ASCE 38-02. This document sets quality standards for data collected from existing records, oral recollections, physical observation (e.g., location of aboveground utility features), and geophysical methods. Existing information can be shown on the drawings with a visual symbol identifying the quality of the information, which is useful for the contractor. For completeness, many agencies try to show all major utilities on the drawings. Conversely, minor utilities, such as local services, house connections, irrigation, and building drainage lines, are not typically shown. Contractors are usually required to locate, avoid, protect, and/or relocate minor lines as part of the bid price. If the contract documents observe this distinction, it is important that major and minor utilities be clearly defined. A potholing program should be required to be submitted, approved, and carried out to locate major lines prior to scheduled work so that mitigations can be implemented without impacting the project schedule. The potholing stage and positive identification of underground features are often the first sources of contractor notices of differing site conditions and potential claims. “Waiting to pothole” does not justify a schedule extension for the contractor, nor does a potholing requirement mean a guarantee against extra cost for the owner. The designer also needs to identify possible contamination associated with existing utility lines or areas previously operated by utilities, such as coal gasification facilities and underground fuel storage tanks. Routine environmental testing during field investigation will help identify contaminated soil and groundwater. In urban environments, multiple utility owners will be involved throughout design and construction to approve relocation designs, coordinate with the relocation contractors (some only allow preapproved contractors), and review monitoring data. The utility owners’ coordination requirements, with their contact information, need to be conveyed in the construction contract along with the design and payment provisions. The contract may include agreements with utility owners for permitting, schedule constraints, and payment. Sixty Percent Design At this stage, the level of detail and scale of the plans increase to include alignment geometry; structural design for initial and final lining systems; cross sections; interfaces between different types of construction, utility routing, and track alignment; and geotechnical instrumentation. Ancillary space drawings show room sizes and locations of all electrical and mechanical elements, including lights, switches, outlets, diffusers, and thermostats. Door and window details may be included. Structural members are sized, and concrete foundations, floor slabs, and beams show preliminary reinforcement details. This submittal should resolve most comments received from review of the 30% submittal, as well as information developed since then. A draft set of specifications may be included at this stage. However, it is important to agree on the specification philosophy—that is, to establish whether prescriptive or performance specifications will be used for each technical section Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 64 Chapter 5 (see the section “Specifications”). An outline of the general requirements (sometimes called Division 1) is usually included to establish the framework for bidding requirements and many of the construction and coordination requirements. The basis of the design report may also be updated at this level of design. In addition, a draft of the geotechnical baseline report (GBR) is typically produced in DBB projects at this level (see Chapter 3 for a discussion of the GBR). It is important that a broad understanding of construction methods be incorporated into these permits and agreements to avoid unreasonable limits being placed on the work. At this 60% stage, it is common to perform a constructability review (described later in this chapter). One of the key factors for the underground project is the availability of working space in what are typically very small work areas. The constructability review usually considers the need for permanent and temporary easements, so that real estate acquisition can proceed. Another result of this constructability review is input to permitting and memoranda of agreement documents with jurisdictional authorities and third-party stakeholders. It is important that a broad understanding of construction methods be incorporated into these permits and agreements to avoid unreasonable limits being placed on the work. A draft bid item list is also typically produced for and discussed in the constructability review. Ninety Percent Design At this stage, the plans and specifications should be essentially complete and should include details for all structural, architectural, mechanical, and electrical elements—such as concrete reinforcement; liner systems; weld sizes; bolts; beam, hardware, door, mechanical, and electrical schedules; wiring details; and ductwork layouts and sizes. A complete set of technical specifications should be provided, including the front-end and completed bidding schedules and measurement and payment provisions. The submittal should also incorporate the results of interdisciplinary coordination. The designer’s role is increased in underground projects to assist estimators and others preparing the measurement and payment provisions. This is because of the inherent uncertainty in ground behavior and requirements (type and quantity) for items such as excavation method, ground improvement, and building protection. These are all costs that depend on the contractor’s proposed means and methods for those ground conditions. For example, ground support types will vary depending on the ground conditions, and an estimate of ground conditions, as well the length of tunnel within each condition, is needed for underground projects. One Hundred Percent Design The final submittal will incorporate the resolution of detailed review comments from the owner and regulatory agencies. All final design deliverables must be signed and sealed by a licensed professional engineer in the state having jurisdiction. Permits and easements for property must be completed in those jurisdictions that require them prior to advertising or notice to proceed, or they should at least be evaluated against the anticipated construction schedule. Throughout each design phase, reviews by third parties are important for input on design requirements, and ultimately for obtaining permits to proceed with the work. The starting point depends on the expected time frame for the reviews and approvals. These Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Design 65 will be required for such underground projects as utility relocation (discussed earlier); tunnels under freeways, railroads, major waterways, pipelines, and sewers; and other large or sensitive underground facilities that may take years to obtain and establish criteria for. Coordination should not be left to the contractor alone because of the duration of the project and the potentially unknown scope of work (with both DB and DBB). Other longlead items such as real estate acquisition, traffic management, and community outreach for street closures can be unique for underground projects. Reviews for quality assurance are described in the “Quality Assurance and Control” section. D E S I G N D O C UM ENTS The design documents (deliverables) prepared by the designer are normally identified in the scope of work prepared by the owner or its designer/program manager. They usually include the following in draft and final versions following the percent-complete milestones described earlier: ■■ Baseline surveys of proposed alignments ■■ Requirements for right-of-way and property acquisition ■■ Utility service/relocation plans ■■ Geotechnical reports (discussed in Chapter 3) ■■ Reports or memoranda related to such things as tunneling methods, hydraulics, fire and life safety, utility routing, emergency egress, lining design ■■ Final design documentation reports and calculations ■■ Detailed plans and specifications ■■ Operations and maintenance manual ■■ Electronic files for design (computer-aided design/BIM) Deliverables can be handled differently for DB projects than for DBB projects. This is because when DB methods are used, the design is generally not complete at the time of construction start. For a project using the DB delivery method, the DB designer, under separate contract to the contractor, completes the final design concurrently with construction of early work items. The contract language between the owner and the contractor/ designer usually specifies the completeness required for all the various deliverables. Design to allow early construction can be packaged in advanced or advanced partial design units (APDUs), also known as concurrency or phased construction packages. APDUs are typically produced by the contractor and approved by the owner to enable work to begin on a portion of the project before the total design is complete. The resulting overlapping design and construction are the source of much of the time savings that is achieved by using the DB delivery method. APDUs typically include the excavation support systems, demolition, and utility relocations. Plans Although the plans graphically depict the configuration of the work, the narrative specifications document forms the requirements for accomplishing the work. Designers must be careful to observe this distinction and thoughtfully place information, depending on whether the information is best graphically conveyed or in narrative text. This can be a special concern when drawings contain many notes, and care must be taken to avoid conflicts between the drawing notes and the specification requirements. Owners also have Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 66 Chapter 5 preferences for presentation of information. Some prefer to prepare drawings with standard notes that their contractors and inspectors have become familiar with over the years. These are then issued, often with references to “standard specifications” or “standard drawings.” Specifications Opinion is divided in the underground industry as to whether contract specifications should be prescriptive or performance based. Most specifications are a mix of both types. As the name suggests, prescriptive specifications prescribe materials and construction methods the contractor must use for the work. Performance specifications provide a description of the desired end product and various criteria that the end product must achieve. Underground projects may use more prescriptive specifications than aboveground projects, particularly to mitigate underground risk. A basic example would be a specification of pressurized face tunnel boring machines, operating in pressurized mode at all times in an effort to mitigate settlement risks. Other mitigations listed on risk registers, such as ground improvement, may be included in the prescriptive specifications. Also provided for in the specifications may be task forces that will make decisions during construction. To allow contractors more flexibility, these specifications may allow the contractor to select the type of ground improvement, such as grouting, dewatering, or ground-freezing, prior to cross-passage construction. Performance specifications allow for contractor ingenuity but come with the owner’s acceptance of alternative designs. And while prescriptive specifications may reduce risk, they may also increase cost and shift responsibility for the design to the owner. (See Chapter 4 for a discussion of the allocation of risk to the party best able to control it, and how the contract provisions identify the parties that are expected to mitigate the risk.) Large agencies, such as state highway departments, typically have standard specifications for construction. These provide proven methods and materials, and both the agency and contractor become familiar with the requirements. However, underground construction standard specification sections—such as tunnel boring, ground improvement, and sequential excavation—may not be included. In this situation, the designer should provide supplemental specifications, which must correlate with the philosophy of risk allocation used in the standard specifications. Specifications are used differently on DBB projects than on DB projects. On DBB projects, the specifications included in the bidding documents are intended to include the means, methods, materials, and equipment that are allowable, and/or identify those that are not allowable. They also set forth limitations and quality aspects associated with obtaining an acceptable end product using those allowable processes. The contractor identifies how it wants to work within those allowable processes, and provides details in the form of construction submittals, including shop and working drawings, which are approved or accepted by the engineer-of-record (EOR). Construction is then undertaken in accordance with the approved submittals. On DB projects, the procurement documents set forth some basic technical requirements and may provide a specification template as an indication of the level of quality expected by the DB design team. The DB designer, working with the DB contractor, then creates the construction specifications—which set forth only the means, methods, materials, and equipment that the DB team intends to use and the quality processes and submittals needed to verify attainment of an acceptable end product. In theory, these specifications may be shorter, as design requirements and all possible means, Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Design 67 methods, materials, and equipment do not need to be included. Pre-construction submittals of shop drawings and working drawings can then be limited, because the plan has already been developed and described in the final design plans and specifications. Geotechnical Reports Geotechnical reports are major components of the contract documents. It is common and recommended to incorporate the GBR and GDR into the contract documents and to define the order of precedence in the event of a conflict between the two (see Chapters 3 and 10). Geotechnical information is also used by the owner to apply for a tunnel classification in California (see Chapter 2). D E S I G N R E V I EW The strength of a design firm is its ability to provide clients with a final design that is technically excellent and cost-effective. At a minimum, professional liability is measured against the industry standard of care. That would certainly include a robust quality control program to ensure both that the correct work is being performed and that the work is being performed correctly. Include a robust quality control program to ensure both that the correct work is being performed and that the work is being performed correctly. Quality Assurance and Control To verify that the work is being performed correctly, designers must follow established quality assurance/quality control (QA/QC) procedures to ensure that calculations, reports, specifications, drawings, and testing are prepared in a manner that substantiates and verifies the design. Most owner agencies have established quality requirements set forth in the general requirements for the project and other quality procedure documents. Multidisciplinary quality reviews should be conducted at each interim stage of design to ensure that all engineering disciplines are coordinated. This review should be performed by senior technical staff, including a representative of the quality team who is knowledgeable about the project and preferably an expert in one of the key disciplines. Three examples of interdisciplinary issues specific to underground construction are 1. Environmental—chemistry of ground and groundwater as inputs to concrete mix design requirements (structural); 2. Ventilation design as input to space allocation (architectural) for underground rail stations; and 3. Electrical power supply requirements for the tunnel boring machine (TBM), any required backup equipment, and design within the tunnel. At a minimum, the quality procedures should include guidelines for reviewers to indicate corrections, for those comments/corrections to be checked for validity, and for changes to be made and backchecked. The entire process should be tracked using a sign-off system of some kind. This method captures design conflicts before the drawings are released to prospective bidders. The challenge that most designers face is to develop and implement a robust QA/QC process that verifies the quality of the deliverables without creating a Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 68 Chapter 5 process that is so time- and labor-intensive that it detracts from the value of the delivered work product. In addition to the design coordination between the design team’s disciplines, the checks also need to include those for incorporating third-party and owner review comments, elements of the environmental documents (mitigation measures), the risk register recommendations, and other peer/technical review comments that need to be incorporated into the contract. The environmental mitigations may be related to construction requirements (e.g., hauling routes and noise restrictions or specific designs such as required height and type of fencing around the tunnel construction staging site), which can vary between different regulatory agencies, or required noise and vibration mitigations. To confirm that the optimal work is being performed for the price, many larger projects now include an additional form of design review or value engineering by an independent party. The most common types of external quality reviews are discussed in the following sections. Technical Review Panels Technical review panels are typically convened at critical points in the design of the project, such as when major decisions must be made on the project approach and design assumptions. Typical input by these panels includes the type and extent of geotechnical investigations and testing. The review panel usually consists of individuals with expertise in specific disciplines related to the project and who have knowledge about similar projects nationally or internationally. The reviews, which take place over a period of approximately three to five days, involve presentation of the critical design assumptions used by the designer in the preparation of the given level of design. Items reviewed comprise the design criteria manual, including the list of codes and standards; typical drawings and specification sections; and any other reports that were created to establish the design. Comments received from the technical review panel are incorporated into future submittals. Such panels are especially useful in coalescing divergent opinions and enabling owners to make key decisions in a timely manner. Because of the nature of these reviews, and the need to incorporate changes into the design in a timely manner, it is recommended that technical review panels be brought in before proceeding beyond the 60% design stage (see the box “Successful Technical Review Panels”). Successful Technical Review Panels When the San Francisco Municipal Transportation Agency designed and constructed tunnels under existing San Francisco Bay Area Rapid Transit (BART) district tunnels, an independent review panel (IRP) was engaged. The IRP engaged with the designer, construction manager, and contractor to review design documents, construction practices, and instrumentation data, thereby ensuring the state of the practice was employed to protect BART facilities. The twin tunnel crossings were completed in 2013 and 2014 with minimal measurable settlement and no disruption to revenue service. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Design 69 Peer Reviews Panels for peer reviews typically involve fewer participants—sometimes even a single reviewer. Peer reviewers can be members of the designer’s firm who are not directly involved in the day-to-day design work on the project, but are knowledgeable about the type of project and construction methods. They are often used for constructability, cost estimate, and schedule reviews, and usually provide a detailed critique of all drawings, specifications, and other documents. More detailed peer reviews may be called on to assist owners during planning stages when major decisions on facility types and configurations need to be made. In the underground industry, these peer reviews have been called on to look at alternative tunnel designs—for example, large single versus twin bore tunnels or tunnels versus aerial sections (Saki et al. 2018). Board of Consultants For review of some disciplines, such as geotechnical engineering, the designer or owner may create an independent board of consultants, typically staffed by world-renowned experts, to meet periodically during design (and sometimes throughout construction) to review and comment on the design or progress of the work. Because of the periodic nature of the review, the board meetings normally last from one to three days. Like technical review panels, consultant boards submit a formal list of comments, which must be addressed by making changes or responding to the comments and can be similarly useful in achieving consensus on key design issues (Elioff and Edgerton 2004). Value Engineering Projects funded by federal agencies usually require value engineering as a condition of approval for funding (FTA 2016). Focused on cost savings or risk reduction, value engineering is performed after the preliminary design or at the 30% or 60% stages. It is unusual to hold such reviews after the 60% stage, because it becomes too difficult to make the necessary revisions or to do so without delaying completion of the design. Construction phase value engineering is also common and described in the “Value Engineering Change Proposals” section. Constructability Review For underground projects, a constructability review is generally done at the 60% stage by a group of engineers or contractors knowledgeable in construction. This review may be combined with the value engineering study, and in some cases, it is performed by the construction manager if that entity is engaged at the time of the review (see Chapter 6). The review gives the designer input on such factors as work space available for staging and construction, feasible construction methods, available materials, and allowable construction time. This review also serves a quality function, providing a detailed review of plans and specifications to confirm they are coordinated (CMAA 2015). Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 5 70 Independent Cost Estimates Independent cost estimates (see Chapter 7) should be carried out during design and as part of the final design reviews. They are used to assess and verify the engineer’s estimate or anticipated cost and add to understanding of major risks and other potential inconsistencies in design. Biddability Review At the 90% stage, some owner agencies commission a biddability review, which focuses on whether the bidding requirements (including the bid schedule and measurement and payment provisions) are crafted to solicit the most economical bid prices, and whether the requirements would be uniformly understood by the bidders. Some owner agencies combine the constructability review and the biddability review, arguably to save time and money associated with the review process. In making such a decision, consider the purpose of the review, and whether there will be enough time in the schedule to incorporate recommended changes into the bidding documents. Owners that use two separate reviews use an early (60%) constructability review, to allow results to be incorporated into the final design through changes in drawings and specifications, and a later (90%) review to make changes only to the payment provisions to achieve the best economic competition for the given design. Open House/Industry Review Another way to gather input from the construction community is an industry outreach meeting or project open house. During these meetings, prospective contractors are invited to participate in limited review of the proposed construction plans at either the 60% or 90% level of completion. Contractors provide comments on means and methods, terms, and conditions that affect their bid price. Comments that are agreeable to the owner and comply with its established procurement regulations are then incorporated into the documents before bidding. In summary, ensuring a quality work product that is cost efficient and buildable requires verification both that the work product meets the standard of care in the industry and that the design solution provides the best value to the client. This necessitates numerous reviews by designers as well as those experienced with the ground conditions and construction methods proposed. CO N S TR U C TI O N SU PPORT The role of the designer during the construction phase is to support the owner and/or the construction manager, depending on how the project is delivered. Although the construction manager becomes the primary contact between the owner and the contractor, the designer will still be required to review shop drawings and working drawings, prepare design changes that may be needed, review instrumentation data, solve design problems associated with site conditions that differ from those described in the contract, and respond to questions (requests for information [RFIs]) from the contractor. Contracts may use the term engineer to mean the owner’s representative. At any given time, this may be the construction manager, resident engineer, or EOR. When the construction manager and designer have a Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Design 71 good working relationship, many problems encountered in the field can be resolved. Early communication between these parties and agreement on roles and responsibilities will facilitate problem solving under the pressure of the construction phase when crews with equipment and materials are waiting for a reponse or direction. In a DBB contract, the designer supports the owner as the EOR, responsible for preparation of the 100% design submittal used for solicitation of the contract. During construction, the EOR should evaluate all design-related RFIs and changes. In addition, to ensure compliance with the contract documents, the EOR should review shop drawings, catalog cuts, mockups, and the like, which are prepared by the contractor as required by the submittals sections of the contract documents. The EOR may also provide field support when issues arise, investigate as-constructed conditions, investigate potential differing site conditions, and prepare design changes to mitigate those conditions or provide suggested construction solutions to such problems. During a DB project, the owner’s designer has a smaller role. The role of the EOR is taken by the contractor’s designer, with the owner’s designer mainly responsible for oversight. As the one who established the functional requirements, design criteria, and standards to be applied to the project, the owner’s designer is required to review the contractor’s submittals to ensure compliance with the technical requirements, respond to certain RFIs, review changes resulting from field conditions, evaluate differing site conditions if they affect design criteria, and provide design-level surveillance of the construction to ensure compliance with the contract. Irrespective of the project delivery method, the EOR is always responsible for reviewing and approving the contractor’s design product and related execution submittals for conformance with the design requirements. During construction, in both DB and DBB projects, changes happen in the field for a multitude of reasons, such as differing site conditions, owner-directed changes, or something that just does not fit. The EOR in a DB project will resolve those issues (that do not require a change to the approved design) without any input from the owner’s designer. Any of these field changes that do require changes to approved drawings and specifications will typically require approval of the owner’s designer. In addition to the EOR’s review of construction phase documents, on underground projects, it is usually a good idea to perform geological mapping of the face or walls during excavation. This will allow the EOR to confirm that the ground encountered is the same as was assumed in the design and thus that the design is appropriate. Geological mapping is traditionally done by the designer’s staff but can also be done by the construction manager’s staff. Mapping should be performed by someone who is not responsible for inspecting production and quality. The typical DBB approach to the contractor’s design submittals assumes that the EOR should have little input on how the project is constructed, as long as the project ultimately performs as required. However, in underground construction, because of the interaction between construction methods and ground behavior (see Chapters 3 and 11), the EOR and the owner are often interested in the contractor’s means, methods, techniques, procedures, sequence of construction, and quality control procedures. Drawing on the construction manager’s and the designer’s expertise, confirmation of and responsibility for differing site conditions and changes can be more quickly resolved. Generally, this is accomplished by (1) requiring in the specifications that the contractor submit certain proposed means, methods, techniques, sequences, and procedures for approval; and (2) requiring that the Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 72 Chapter 5 construction manager and the EOR approve those specific means and methods as they are set forth in the technical submittals. The EOR’s presence in the field generally results in more timely responses and better communication with the contractor’s field staff and is recommended, especially where the field performance affects the design sufficiency. An example of such a circumstance is on tunnels and cut-and-cover structures in the interaction between (1) the geotechnical engineer, (2) the support-of-excavation designer, (3) the building protection program representative, and (4) the geotechnical instrumentation monitor. Where damage to third-party buildings may occur, it is critical that these four entities communicate daily while excavation is underway and until the potential for ground movements no longer exists. Examples of submittals where the construction manager’s and EOR’s comments on the contractor’s proposed means and methods might be appropriate and useful on a tunnel job are the following: ■■ Working drawings* for each tunnel portal or shaft ■■ Working drawings for the support of excavation ■■ Working drawings for the TBM and trailing gear ■■ Proposed methods for excavating the tunnel and measuring and transporting muck The reason for such submittals is to ensure that construction impacts on adjacent third parties will not exceed that set forth in the NEPA and California Environmental Quality Act documents, permits, and memoranda of understanding. T ES TI N G A N D COM M I SSI ONI NG/OPERATI ONS A ND MA INT ENA NC E The operations and maintenance (O&M) of a new facility should be considered throughout the design process, regardless of the delivery method. To adequately address the future O&M costs, the designer must coordinate with the owner’s staff to become informed about existing systems and procedures and determine any training that may be needed. When considering whether to introduce new technology in the design, the design team should consider whether current procedures and existing worker skill sets are adequate, and whether enough maintenance personnel are available to meet the needs of the new workload. To allow for periodic inspections, tunnel facilities usually include provisions for access. For transportation tunnels, access is usually provided at off-revenue hours and is relatively easy to accommodate from existing portals and/or stations with existing ventilation systems. For water and wastewater tunnels, access points must be designed into the system. Some owner agencies have used remotely operated vehicles to document existing conditions. These systems are either wireless or limited by the length of the cord from the access points. Most agencies allow for inspections by personnel, and thus provisions must be made for ventilation systems to provide safe access. The frequency of inspections varies depending on * Working drawings, as defined by LACMTA (2012), are “original drawings prepared by the Contractor and/ or its Subcontractors or Suppliers, of any tier, illustrating Work required for construction that will not become an integral part of the completed Work. This includes, but is not limited to, drawings for temporary structures such as decking, bulkheads, excavation supports, utility support, groundwater control, forming, and false work.” Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Design 73 Life-Cycle Cost: DC Water A recent evaluation of the life expectancy of the Anacostia combined sewer overflow tunnel system in Washington, D.C., currently under construction, indicated that 95.3% of the value of the $1.5 billion construction cost was expected to last at least 100 years. The underground facilities and nearly all of the near-surface facilities were designed to meet service life criteria of at least 100 years. The pumping and other equipment and some structural components (e.g., doors, handrails, double leaf access hatches) of the near-surface structures were designed to provide a service life of approximately 25 to 30 years before major replacements are required. the service and the anticipated deterioration. A recent water tunnel inspection in California resulted in a recommended frequency of between 5 and 20 years (Tsztoo et al. 2018). As construction costs continue to rise, owners are becoming more concerned with the long-term useful life of new structures and the costs associated with operating and maintaining them (see the box “Life-Cycle Cost: DC Water”). As a result, designers are being asked by some owners to evaluate life-cycle costs for proposed facilities. Life-cycle costing analyzes O&M costs, including cyclical replacements of major mechanical, electrical, and structural components if their individual useful lives are shorter than the overall life of the facility. V A L U E E N G I N EERI NG CH ANGE PROPOSA LS The start of construction does not mean that no further opportunities exist for the owner to save money. Contractors usually have experience that designers do not and may be able to identify additional ways to optimize construction or save time and money. The value engineering change proposal (VECP) provision gives contractors an avenue to suggest these savings as proposed changes. On a DBB project, VECP provisions allow the contractor to submit changes to the plans or specifications, which will reduce the cost, schedule, or complexity of the project to the mutual benefit of the contractor and the owner. As part of the submittal, the contractor must submit all design changes, a cost estimate and schedule, and any other documentation that supports the VECP. Approval of the proposal is generally at the discretion of the owner, so it behooves the contractor to make sure that the benefits of the proposal balance the time that the contractor’s staff will spend preparing it. On the owner’s side, the VECP should be carefully evaluated by experienced designers who can also weigh the changes against impacts on construction schedule as well as other elements of design and the criteria. On approval, the owner and contractor typically share the net savings evenly. The concept of a VECP proposal on a DB project has been viewed differently in some cases. Where requirements are performance based, the owner should have received value in the DB proposal, and a VECP would not be appropriate. On projects where certain requirements are prescriptive, however, the use of a VECP provision would provide a mechanism to allow changes to prescriptive requirements while still respecting the sanctity of the economic bid process. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 74 Chapter 5 CO N C LU S I O N S AND RECOM M END ATI ONS Design of large-scale underground projects requires an experienced multidisciplinary team. The designer’s overarching responsibility during the design phase is to generate design packages that create drawings and specifications that (1) depict an end product that will meet the owner’s needs; (2) set forth administrative processes to allow construction to be accomplished in an effective manner in accordance with the applicable laws, permits, and environmental documents; and (3) establish quality mechanisms to document the required performance. During construction, the designer must support the owner, construction manager, and contractor with design support, submittal review, evaluation of value engineering requests, change notices, and other analyses as appropriate to the selected delivery method. ■■ Recommendation 5-1: Where underground solutions are technically feasible, the evaluation of alternative alignments should consider the impact of increased property values around underground transportation projects and the life-cycle cost benefits on tunneled water/wastewater projects. ■■ Recommendation 5-2: Use CI/ASCE 38-02 or its equivalent for the collection and depiction of existing subsurface utility data. ■■ Recommendation 5-3: Include and clarify responsibility for mitigation measures as set forth in the environmental documents and risk registers in contract documents as appropriate for design-build (DB) or design-bid-build (DBB) contractor’s scope of work. This exercise also helps establish the basis for prescriptive versus performance specifications for various aspects of the design. ■■ Recommendation 5-4: Use building information modeling (BIM) for complex underground projects as well as for final as-built models for the owner’s use with the facility’s operations and maintenance. ■■ Recommendation 5-5: Clearly indicate in contract documents the party (or parties) responsible for utility maintenance, protection, support, and relocation. For DBB contracts, indicate all major utility lines in the contract documents. For DB projects, the DB contractor may be responsible for identifying all minor utility lines and designing required support, protection, and relocation. Contract documents should include a provision that major lines found in locations not shown may be considered a differing site condition. The quality/source of the utility data should be clearly identified. ■■ Recommendation 5-6: In addition to utility coordination, other third-party inputs such as for permitting, approvals, or designs also need to begin early to identify the requirements and to schedule the approval process within the contract documents. ■■ Recommendation 5-7: For DB contracts, the submittal of early, separate design packages should be anticipated for advanced work such as utility relocation, support of excavation, and demolition to enable work to begin on a portion of the project before the total design is complete and allow overlapping design and construction. ■■ Recommendation 5-8: For underground contracts (DB or DBB), the designer may specify the submittal of working drawings depicting means and methods that are important to the design concept. However, the scope of the submittal review should be limited to what is necessary to verify design intent and ensure that agreements with third-party stakeholders are kept to afford the contractor as much flexibility as possible to incorporate innovative technological solutions. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Design 75 ■■ Recommendation 5-9: The engineer-of-record (EOR) or his or her representative should be on site full-time during initial mobilization to ensure efficiency of submittal review and when underground excavation is underway to verify that actual conditions are as anticipated and to make design revisions if necessary. This includes reviewing instrumentation data against anticipated performance of excavations. ■■ Recommendation 5-10: To reap the benefit of the contractor’s innovation, a value engineering change proposal provision should be incorporated into all underground construction contracts. ■■ Recommendation 5-11: Consider project useful life and consider requirements for durability for inclusion in the contract documents. Such requirements would include design life, durability studies, and compliance with applicable standards for materials exposed to the environment. ■■ Recommendation 5-12: For DB procurements, the detailed scope of work expected of the design team should be clearly set forth in the DB solicitation documents, so that an accurate level-of-effort estimate can be included in the contract price. ■■ Recommendation 5-13: The owner’s expected order of precedence of the contract documents should be known by all designers starting from the preliminary design phase to establish what information should be represented on plans versus specifications versus special conditions and/or provisions. The availability and applicability of agency standard plans and specifications should also be established at the preliminary stage of design development. R E FE R E N C E S Brierley, G., Corkum, D.K., and Hatem, D.J., eds. 2010. Design-Build: Subsurface Projects, 2nd ed. Littleton, CO: SME. CI/ASCE 38-02. 2002. Standard Guideline for the Collection and Depiction of Existing Subsurface Utility Data. Reston, VA: American Society of Civil Engineers. CMAA (Construction Management Association of America). 2015. Construction Management Standards of Practice. McLean, VA: CMAA. Elioff, A., and Edgerton, W.W. 2004. Design review boards—current state of practice. In North American Tunneling: 2004 Proceedings. Edited by L. Ozdemir. Rotterdam, The Netherlands: A.A. Balkema. pp. 5–13. Felice, C.W. 2018. Design submittals—An undervalued element of risk management in design-build contract delivery. Deep Foundations Mag. (Jan/Feb 2018). Hawthorne, NJ: The Deep Foundation Institute. FTA (Federal Transit Administration). 2016. Article 4.7.6: Value engineering. In Project and Construction Management Guidelines, updated March 2016. Washington, DC: U.S. Department of Transportation. pp. 4-42–4-44. LACMTA (Los Angeles County Metropolitan Transportation Authority). 2012. Contract No. C1045: General conditions. Pro Form 042-D/B, GC-01, 1.2—Definitions, revised. December 20. Los Angeles: LA Metro. Parker, H.W. 2007. Risk analyses and life cycle costs of underground facilities. In the Second Half Century of Rock Mechanics: 11th Congress of the International Society for Rock Mechanics, 3 Vols. Edited by L.R. Sousa, C. Olalla, and N. Grossmann. London: CRC Press. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 76 Chapter 5 Saki, S.A., Brady, J.J., Goodfellow, R.J.F., et al. 2018. Bart Silicon Valley (BSV) Phase II, tunneling methodology—comparative analysis independent risk assessment. In North American Tunneling: 2018 Proceedings. Edited by A. Howard, B. Campbell, D. Penrice, et al. Englewood, CO: SME. pp. 596–605. Tsztoo, D., Yu, A., and Redhorse, T. 2018. Rehabilitation of tunnels: An owner’s perspective. In North American Tunneling: 2018 Proceedings. Edited by A. Howard, B. Campbell, D. Penrice, et al. Englewood, CO: SME. pp. 698–704. Venturini, G., Maltese, F., and Teetes, G. 2018. 5D BIM applied to cost estimating, scheduling, and project control in underground projects. In North American Tunneling: 2018 Proceedings. Edited by A. Howard, B. Campbell, D. Penrice, et al. Englewood, CO: SME. pp. 3–10. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 61 Construction Management I N TR O D U C TION Owner agencies should be aware that the role and characteristics of the construction manager* on an underground project differ in some respects from those on a typical heavy civil or public works construction project. For example, underground construction requires engineering and inspection staffs to be knowledgeable enough about underground activities to safely observe and document all of the construction activities without getting in the way of the contractor’s production staff in a very congested work environment. This chapter discusses both the selection and use of consultant construction managers on underground projects and the scope of work items typically performed by the underground construction manager. Differences between a construction manager on a design-bidbuild (DBB) project and a construction manager on a design-build (DB) project are noted. Because most underground work is done by specialized contractors working as the prime contractor, there is little benefit to using an at-risk construction manager to manage subcontractors on underground work, and as a result, this delivery method is not prevalent in underground construction (see Chapter 10). Accordingly, this chapter addresses only agency construction management services, defined as “a form of construction management performed in a defined relationship between the construction manager and Owner. The agency form of construction management establishes a specific role of the construction manager acting as the owner’s principal agent in connection with the project/program” (CMAA 2015). N E E D FO R A SPECI AL I Z ED CONSTRU CTION MA NA G ER Tunnel construction requires the use of expensive, complicated equipment operated by specialized workforces. As described in previous chapters, delays during construction to critical path operations, from whatever cause, can lead to expensive and contentious contract disputes, claims, and litigation. To minimize the owner’s risk in these situations, construction Image © WSP/David Sailors * For the purposes herein, construction manager refers to the firm providing the construction management services. CM refers to the individual in the company who leads the construction management team. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 77 78 Chapter 6 managers must maintain accurate and detailed documentation of the contractor’s work activities, so that they can evaluate and resolve construction issues as they arise. Because of the specialized nature of underground construction, most owner agencies in North America employ consultant construction management firms, even if the owner agency has an in-house construction management group. This is usually because (1) owner agencies typically do not maintain specialized underground technical staff within their organization to administer large-scale underground projects that occur infrequently, and (2) hiring such staff as direct employees on a project-specific basis is time-consuming and expensive. As a result, the use of consultant construction management firms allows agencies the flexibility to employ staff specialized in underground construction on an as-needed basis for such projects. Owners typically have limited specialized staff to manage the project, construction management, and design teams. S E L E C TI N G A CONSTRU CTI ON M ANAGER When selecting a construction manager, an owner should consider two main factors: conflict of interest and staff qualifications. Conflict of Interest Although some underground consulting firms specialize in either design or construction management services, many firms offer both. Often an issue arises as to whether those performing owner design services should also do the construction management on the same project or, in the case of a separate procurement process, should also be allowed to compete for the construction management services. Having the design consultant provide construction management has both advantages and disadvantages. A noteworthy advantage is that the construction management cost may be lower because the design consultant’s staff is familiar with the design intent and the administrative agreements with various third parties (e.g., utility companies and adjacent property owners), thus bringing institutional knowledge and minimizing the learning curve. This practice also has a few noteworthy disadvantages. Specifically, the designer operating as the construction manager may be perceived to have a conflict of interest, particularly if the construction manager is called on to make an evaluation of the designer’s liability for errors or omissions. (It should be recognized that the construction manager has its own responsibilities for ensuring that the work is constructed in accordance with the plans and specifications. Depending on the terms of the consulting agreement, the owner could hold the construction manager responsible in the event of a failure to comply with the specifications, thereby requiring a separate evaluation of professional services liability.) The Federal Transit Administration (FTA) provides some guidance on this issue. The Code of Federal Regulations (49 CFR 19.43) states in part: To ensure objective contractor performance and eliminate unfair competitive advantage, contractors that develop or draft specifications, requirements, statements of work, invitations for bids and/or requests for proposals shall be excluded from competing for such procurements. The FTA has incorporated the following discussion of organizational conflicts of interest into Circular 4220.1F on third-party contracting guidance: Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Construction Management 79 (h) Organizational Conflicts of Interest. Engaging in practices that result in organizational conflicts of interest as prohibited by the Common Grant Rules: 1. Occurrence. An organizational conflict of interest occurs when any of the following circumstances arise: a. Lack of Impartiality or Impaired Objectivity. When the contractor is unable, or potentially unable, to provide impartial and objective assistance or advice to the recipient due to other activities, relationships, contracts, or circumstances. b. Unequal Access to Information. The contractor has an unfair competitive advantage through obtaining access to nonpublic information during the performance of an earlier contract. c. Biased Ground Rules. During the conduct of an earlier procurement, the contractor has established the ground rules for a future procurement by developing specifications, evaluation factors, or similar documents. (FTA 2013) Some agencies have interpreted this language to mean that the construction manager must not be associated organizationally with the design team. In fact, the language does not specifically preclude an organizational link, as long as the design firm did not assist in the preparation of solicitation documents for the construction manager consultancy contract. Indeed, in certain sectors of the U.S. underground industry, the construction manager and the designer are organizationally related, although in many cases, the owner has requested different personnel and a separation of management responsibility. When the construction manager and the designer are different firms, the owner must proactively foster cooperation between the two organizations for the benefit of the project. Professionalism and objectivity need to be exercised by all parties to minimize the potential for competitive disagreements that do not advance the project. Staff Qualifications The construction manager and its team must be qualified for the specific project, for underground as well as aboveground projects. Among the key qualifications are the following: ■■ Familiarity with the type of construction. The technical capabilities needed for drill-and-blast construction are significantly different than those needed for a soft-ground tunnel boring machine (TBM), hard rock TBM, or new Austrian tunneling method/sequential excavation method (NATM/SEM) construction. Similarly, knowledge of the type of initial support to be used is critical, because the evaluation of actual geologic conditions plays a significant part in the selection of the support type used. ■■ Expertise in contract administration –– Maintenance and control of documentation that is subject to change as a result of variations in ground conditions; –– Scheduling, including both critical path method (CPM) and linear schedules, which are prevalent in underground construction (see Chapter 8); –– Cost control; –– Effective meetings; –– Payment processing procedures; Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 80 Chapter 6 –– Changes and claims; and –– Submittal and request for information (RFI) reviews and processing are all needed skills. ■■ Familiarity with underground safety requirements. Many special safety considerations for underground work exist (OSHA 2003, 2010), and certain states have other requirements (e.g., CCR 1996). ■■ Knowledge of underground quality assurance/quality control (QA/QC) procedures, and the role of the inspector. Underground inspection teams monitor progress in a detailed format because tunneling is a time-related activity. Inspectors must understand mining activities and sources of downtime and be able to recognize potential impacts that could lead to large time/impact delay claims. In addition, inspectors must be experienced in the construction/QC of the finished product. ■■ Familiarity with proposed delivery method. The roles and responsibilities of the construction management staff on a DBB project are significantly different from those on a DB project. It is recommended that the construction management staff be experienced in the specific delivery method anticipated for use. Additionally, the CM should have a personality that allows him or her to facilitate the partnership of the contractor, owner, designer, and construction management team. An effective CM remains focused on the common objectives and guides all the stakeholders to a successful project completion, with a minimum of conflict. The typical scope of services for an underground construction project requires a CM who is proficient in a broad range of technical and management areas. Some owner agencies require the CM to be a registered professional engineer (PE). However, PE registration does not guarantee mastery in any of these areas, and even specialized tunnel experience is only a part of what is needed. Other construction management responsibilities, such as the review of daily reports and submittals like safety, schedule reviews, and other contract administrative functions, do not require a background in engineering principles, and for such positions, a PE registration is not necessary. Many owners are starting to require or prefer that underground project construction managers have Certified Construction Manager (CCM) designation from the Construction Management Association of America (CMAA) because of the high stakes on these projects. CMAA began a voluntary certification program in 1993, whereby with a combination of owner-verified experience in five phases of construction (predesign, design, procurement, construction, and post-construction) and a demonstrated body of knowledge, individuals may obtain this designation (CMAA 2014). Significant continuing education requirements must be met to keep the certification current. CCM certification may also be considered when an experienced construction manager does not hold a PE license. If the construction management team is led by a resident engineer, most states’ licensing laws require the person to hold an engineering license. Some aspects of the scope assigned to the construction management team require the CM and/or resident engineer to have an understanding of engineering principles. This is not to relieve the engineer-of-record (EOR) of design responsibility, but to understand the type of decisions that should be referred to the EOR. The EOR is always responsible for reviewing and approving the contractor’s design product and related execution submittals for conformance with the design requirements. (For a detailed discussion of the roles and responsibilities of the EOR, see Chapter 5.) Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Construction Management 81 However, the resident engineer must be careful not to take on responsibility beyond his or her role. In most states, the title of engineer is reserved for those having engineering degrees and licenses. An effective CM remains focused on the common objectives and guides all the stakeholders to a successful project completion, with a minimum of conflict. For some construction projects, the owner or a government regulatory agency may require certification that the project was completed in accordance with the approved plans and specifications. For example, in Washington State, the “professional engineer in responsible charge of inspection” must provide a declaration of construction completion stating that the “… facilities were constructed in accordance with the provisions of the construction quality assurance plan and without significant change from the department approved plans and specifications” (WAC 2000a, 2000b). Without full-time inspection presence during the construction period, the EOR is unable to make this certification. The CM, having supervised the QA/QC program, is in the best position to make the certification. For these reasons, and because the CM may be called on to make other engineering judgments during construction, many owners insist that the leader of the construction management team be licensed, although this requirement varies by agency. S C O P E O F W ORK The construction manager’s primary role is to assist the owner in achieving the project’s stated objectives, usually defined as a combination of cost, schedule, quality, and safety. Although the construction manager may not be primarily responsible for any of these specific goals, it is responsible for the coordination of necessary resources to accomplish them. The construction manager can do this either as a full-service consultant or through staff augmentation for the owner’s in-house construction management resources. Integrated project management offices where the designer, construction manager, and owner are colocated on the construction site have been used on many major projects. This arrangement fosters better working relationships among all of the parties and reduces the response time for RFIs and submittals. The following subsections discuss some elements that may be appropriate to include in the construction manager’s contract. Pre-Construction Services As described in Chapter 5, many agencies bring the construction manager on board during the final design and include the preparation of an independent constructability review at the 60% design level to provide this feedback to the designer in sufficient time to incorporate it into the bid documents. Such a review typically focuses on the physical work elements and temporary staging areas to identify design features that may be impractical. In addition, a biddability review can be done at the 90% design stage to identify inconsistencies in the contract documents, particularly in the measurement and payment provisions and working restrictions. Such reviews are typically done in a workshop format, with the designer making an initial presentation, followed by several days of independent workshop activity Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 82 Chapter 6 by members of the construction management team representing various disciplines such as geotechnical engineering, tunnel boring machinery, grouting, structural engineering, and lining systems. The review culminates in a report to the designer. When such reviews are done by the construction manager, it becomes familiar with the design, thus facilitating the partnership approach to project delivery (although at the expense of some independence in the design process). Using the construction manager for a constructability review in this manner is recommended. Risk workshops are a common feature of underground construction planning and design. The construction manager is in an excellent position by virtue of education and experience to play a role in the establishment of risk management processes and follow it through during the construction phase (see Chapter 4). Cost estimates are usually done several times during design (see Chapter 7). Some owners select the construction manager early in the project and include all cost estimating in the construction manager’s scope of work. This is because the construction manager (1) may be more familiar with crew sizes and production than the design staff, (2) can provide an independent look at the design and thereby identify constructability issues during the cost estimating process, and (3) may not feel pressured to minimize the cost to meet a stated budget and thus produce a more realistic estimate. Other portions of the work scope typically performed by the construction manager during pre-construction include a review of the solicitation and contract documents to ensure consistency across all documents, development of special conditions, preparation of bidding documents and Division 1 specifications, as well as bid and award assistance, which can include reviews of contractor’s bids and comparisons with the engineer’s estimate. Pre-construction surveys are frequently performed by the construction manager’s staff, or in some cases by the contractor as an early-work item, with coordination by the construction management team. Contract Administration The construction manager is responsible for day-to-day contract management, including correspondence, schedule updates, and verification of pay applications. Change management items—including tracking change requests, owner change notices, time impact studies, cost analysis, time extension requests, change negotiations, and preparation of modifications—are common parts of the work scope assigned to the construction management team. Contractor claims are not uncommon in underground construction. Typically, such claims relate to unexpected conditions and are therefore pursued under the differing site conditions clause, but they can also be based on other remedy-granting clauses. Some owner agencies exclude claim evaluation from the construction manager’s scope, with the intent for in-house staff to handle claims or hire a separate consultant later if the volume of work makes it necessary. Others include the claim evaluation in the construction manager’s scope, although typically as an allowance item that can be authorized separately when needed. One of the advantages of including a claim evaluation within the construction manager’s scope is that timely investigation of contractor claims is not only the owner’s contractual responsibility, but also is crucial to maintaining the project partnership. When a differing site condition arises, it is important for the owner’s representative to immediately review it and, if conditions so dictate, direct the contractor to make specific changes as necessary. For example, to properly evaluate a penetration rate claim may require that an extensive data Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Construction Management 83 collection, monitoring, and evaluation plan take place over several months. The need for timely action does not allow for solicitation of a separate contract for claims support at that time. The design engineer should also be involved in the investigation and determination of merit for differing site conditions; however, using the design engineer as the owner’s primary representative to evaluate contractor claims is not recommended. The skills necessary to manage the evaluation of merit and quantum of these claims, and the objectivity needed to do so, make the CM the individual best qualified to perform this scope of work. Project Administration The day-to-day project management scope on an underground project is not all that different from other aboveground or heavy civil infrastructure projects. It includes processing of submittals, RFIs, progress schedules, and coordination meetings. Although typically the critical path for an underground project goes through the tunnel excavation activity, this is not always the case, and the construction manager’s scheduler should have underground experience and the ability to properly evaluate the reasonableness of the contractor-submitted schedule. Logic and durations for the underground work depend on the proposed means and methods. It is not enough for the construction manager’s scheduler to know the CPM software. The scheduler must also understand how the work is planned to be prosecuted. Communication among the scheduler, resident engineer, and other construction management staff is critical to effective schedule management. For DB projects, it is important that the construction management staff, particularly the scheduler, understands that the level of detail included in the schedule will vary from that on a typical DBB project, particularly because design is ongoing and the design-builder’s plan for construction may not be fully developed. For DB projects, the level of detail included in the schedule will vary from that on a typical DBB project, particularly because design is ongoing and the design-builder’s plan for construction may not be fully developed. Quality Management Until recently, all the quality control systems, inspection, and testing on a typical underground project were under the purview of the owner’s construction management consultant. This requires full-time inspection on each shift to monitor that the work is completed in accordance with the contract plans and specifications and to provide documentation in the form of inspector’s daily reports, field and laboratory test reports, and other quality control documentation. One of the main roles of a tunnel inspector is monitoring tunnel excavation progress, ground conditions, and initial support that is not an element of the finished product. By its very nature, work underground must be inspected during construction, because it is covered up as the work is done, and thus not able to be easily verified at a later date. As a result, the construction management team usually includes a full complement of inspectors and testing agencies. This differs from aboveground projects, where it is not uncommon for inspectors to only look at items that are incorporated into the final product. However, within the past 5 to 10 years, there has been an increasing trend toward having the quality control provided as part of the construction contractor’s scope of work. Contractor quality control as a concept is not new: The U.S. Army Corps of Engineers has Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 84 Chapter 6 been doing it for some time. However, the concept is relatively new to most U.S.-based underground contractors that are used to all inspection and testing services being provided by the owner or the owner’s consultant construction manager. As a result, the institutional processes required for an effective contractor QC program are not well developed. For the owner of an underground project to ensure that the requisite quality is provided, there must be (1) a detailed scope of work for the quality program provided as part of the solicitation documents, and (2) a quality verification system established as part of the construction manager’s scope that will provide a complete quality management system. In its simplest form, quality verification is not full-time inspection. It can be spot-checking to verify that the contractor’s quality control system is working. The theory is that making the contractor responsible for quality control, and having the owner’s staff or consultant construction manager verify that it is effective, is a much more efficient way of attaining a quality product. In practice, many owners of underground facilities still think of this as the “fox guarding the henhouse” and use the owner QC approach, even on projects that have included contractor QC in the solicitation documents. It is important to understand that contractor QC is not a required element of projects using the DB delivery method. DB projects frequently do specify contractor QC, but it is not a required part of the DB approach to project delivery: Owner QC has been used on DB projects, and contractor QC has been used on DBB projects. The designer on the DB team has to identify the specific inspections and testing that must be done during construction to ensure that the end product performs the way it was intended, and this does affect the specifications (see Chapter 5). Nonetheless, the delivery method does not necessarily drive the quality management system. Safety The contractor controls the safety on the project site. Each employer is responsible for its own employees, and this responsibility cannot be transferred. The construction manager must ensure that the working area is safe for its employees to enter and perform their specific work tasks. If the construction manager determines that the work area is not safe for its staff, then the construction manager must insist that the contractor provide safe access. Contract provisions must include this responsibility. For underground projects, it is recommended that the construction management team employ a safety manager or safety representative to monitor the contractor’s safety program. If this role is defined as verification of the contractor’s plans, processes, and procedures for fulfilling the contractual safety obligations, the construction management team will not assume overall project responsibility for safety. Whether the safety representative is full- or part-time is primarily related to the size of the construction program and the number of sites being worked at any one time. If the owner uses an owner-controlled insurance program, the level of oversight and the safety management roles significantly change as the owner is integrated into the safety process, and the construction manager may take on responsibility for administration of the owner-controlled consolidated insurance program. CO N C LU S I O N S AND RECOM M END ATI ONS In selecting a construction manager, owners need to consider the construction manager’s qualifications for specific anticipated underground work and experience with the proposed Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Construction Management 85 delivery method. A key consideration is whether use of the designer as construction manager is appropriate for the project. ■■ Recommendation 6-1: Only individuals who have the specialized skills and talents needed for the anticipated underground construction methods and delivery systems should be selected for the construction management team. ■■ Recommendation 6-2: The designated construction manager should be afforded the opportunity to perform a constructability review during design, and also to review and comment on the final design documents. R E FE R E N C E S 49 CFR 19.43. 2014. Competition: Uniform administrative requirements for grants and agreements with institutions of higher education, hospitals, and other non-profit organizations. In Code of Federal Regulations: Title 49, Transportation. Washington, DC: U.S. Department of Transportation. CCR (California Code of Regulations). 1996. Title 8. Subchapter 20: Tunnel safety orders. Article 3: Injury and illness prevention program. Section 8406: Cal/OSHA workplace injury and illness prevention program. Sacramento: California Office of Administrative Law. CMAA (Construction Management Association of America). 2014. Capstone Course: An Introduction to the CM Profession. McLean, VA: CMAA. CMAA (Construction Management Association of America). 2015. Construction Management Standards of Practice. McLean, VA: CMAA. FTA (Federal Transit Administration). 2013. Procedural guidance for open market procurements. In Third Party Contracting Guidance, rev. 4. Circular 4220.1F. Washington, DC: U.S. Department of Transportation. chap. 173-240-090: Declaration of construction completion; and para.2.a(4)(h). OSHA (Occupational Safety and Health Administration). 2003. Underground Construction (Tunneling). OSHA 3115-06R. Washington, DC: OSHA. OSHA (Occupational Safety and Health Administration). 2010. 29 CFR 1926.800. Underground Construction. Washington, DC: OSHA. WAC (Washington Administrative Code). 2000a. Title 173: Department of Ecology. Chapter 173-240: Submission of plans and reports for construction of wastewater facilities. Section 173-240-090: Declaration of construction completion. Olympia, WA: Washington State Legislature. WAC (Washington Administrative Code). 2000b. Title 173: Department of Ecology. Chapter 173-245: Submission of plans and reports for construction and operation of combined sewer overflow reduction facilities. Section 173-245-070: Declaration of construction completion. Olympia, WA: Washington State Legislature. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 71 Cost Estimates I N TR O D U C TION Cost estimates are used throughout the planning and design phases to forecast the cost of an underground construction project. Although designers frequently prepare cost estimates in tandem with design development, some owners select the construction manager early in the project and include all cost estimating in the construction manager’s scope of work. Like other aspects of contracting for underground construction, the preparation of cost estimates is impacted by the unpredictable nature of the materials encountered during construction. Materials encountered in underground construction are naturally occurring, lack consistency, and may not have wholly predictable physical properties. In some cases, the conditions and complexity of these materials can only be fully appreciated after they have been exposed during excavation. Therefore, the complexity of the ground has a major impact on the cost of a project, and the estimator must have as much information as possible about the ground and the anticipated construction means and methods, as well as other more typical factors such as labor productivity and work restrictions. A thorough and professionally prepared cost estimate, based on a comprehensive geotechnical investigation and a full appraisal of the accompanying risks, remains the best way of forecasting, and accounting for, underground construction costs. The complexity of the ground has a major impact on the cost of a project This chapter discusses the various uses of cost estimates, from their most basic function as a tool for evaluating alternatives, securing funding, and establishing a project budget, to their integral role in the design process, wherein they are used to evaluate constructability, safety, and quality and to aid in the identification and quantification of risks. It also reviews methods of estimate preparation and the various inputs, including a brief discussion of the factors that affect project cost, as well as considerations for establishing contract time of performance. It provides an overview of cost estimates prepared during the planning and design phases of an underground project, including the engineer’s estimate, which Image © JeffreyKatzPhotography.com Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 87 Chapter 7 88 should point owners toward some key considerations in planning and preparing quality underground construction cost estimates. This chapter does not address contractors’ cost estimates. However, the section on “Contractor’s Contingency” addresses contractor uncertainty in cost estimating. The chapter concludes with a discussion of the use of contingencies and some recommendations as to when and if the engineer’s estimate should be released to the bidding community. CO S T E S TI M A T E APPL I CATI ONS The U.S. National Committee on Tunneling Technology (USNCTT) stated that estimates are “a measurement of costs that is used by the owner for a variety of purposes throughout the conceptual to completion phase of a project” (USNCTT 1984). Unlike USNCTT, we distinguish herein between the cost estimates prepared during the interim stages of design and the engineer’s estimate that is prepared when the design is complete. We define the engineer’s estimate as an estimate of what a contractor would reasonably bid, based on the bidding document=s, which include, among other things, schedule restrictions and constraints, site conditions, and permanent material specifications. Planning and Alternative Analysis Cost estimates are used for project planning and alternative analysis. For most projects, the designer develops multiple design solutions, and one of the primary considerations in selecting a preferred solution is the expected construction time and cost. In some cases, alternatives are evaluated by comparing the cost of only a portion of the work. For example, in evaluating a water treatment facility that could include either a pipeline or a tunneled alternative, one might compare only the cost of the pipeline portion to the tunneled portion, while making the reasonable assumption that the treatment facilities would be similar for either alternative. Accordingly, detailed cost estimates for the entire project may not be produced during feasibility planning or alternatives analysis. Nevertheless, the selection of alternatives frequently uses cost as an evaluation criterion, and even if multiple detailed estimates are not prepared, it is important that the cost relationship between alternative solutions be similarly portrayed, and key cost areas equitably aligned for a direct comparison. In addition, during the development of comparison estimates, it is important that the project planning team includes individuals who are knowledgeable about the cost (i.e., labor, materials, and equipment) of all the alternatives. For example, using only estimators who specialize in bridges to develop costs to compare a bridge and tunnel crossing would not be appropriate. Budgeting As planning progresses, the owner will need an estimated cost for the entire project to secure funding. To prepare a thorough estimate for budget purposes, the estimator must do the following: ■■ Ensure that the project is adequately defined to enable a reasonable estimate of project cost. Although budgets for building and aboveground infrastructure projects can be determined from square-foot of floor area or other historical unit costs, an underground project differs because the ground conditions must be accounted for, Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Cost Estimates 89 the design advanced sufficiently to enable the estimator to determine the highly specialized means and methods of construction, and most environmental restrictions (such as noise and truck-hauling restrictions) identified. Usually, these factors are not defined until the design is at least 10% to 15% complete. Yet, they can significantly impact costs and time. ■■ Ensure that the construction schedule is sufficiently established to generate reasonable estimates of escalation for labor and materials. Because underground projects are linear in nature, they are typically longer in duration than aboveground projects, and price and wage escalation will be a factor in the total cost. ■■ Identify the risks to such an extent that it is possible to develop a reasonable contingency plan (see the “Contingencies” section). Contingency items must be identified, quantified, and priced to be fully realized. ■■ Prepare a reasonable estimate of owner soft costs (those not expected to be included in the contractor’s bid price), including the acquisition of those permits and rights-of-way that should properly be obtained by the owner (see Chapter 2), design services, construction management, legal costs, relevant insurance program and deductibles, and owner administration. Soft costs typically require a substantial amount of owner input to be fully representative and complete, and the owner should direct the estimator to any guidelines it has in place regarding soft costs. Ultimately, the owner should use the engineer’s estimate as a reference to determine the final soft cost budget itself. The project-specific nature and the variability of the cost of underground construction have led many underground industry experts to recommend that budgeting estimates for underground projects be prepared as bottom-up estimates, using the anticipated quantities and expected construction methods to generate an estimate that uses expected crew sizes and production rates. It is very risky to prepare a construction cost estimate for an underground project based on generalized cost factors or historical data without thoroughly looking into the details of the ground conditions, scope, and schedule. The owner should engage knowledgeable consultants to help prepare early budgetary estimates rather than try to do this in-house with agency staff who might only have historical data to rely on. Spending more on the front end is better than frantically trying to adjust contingencies or cut scope when the project exceeds the budget that was established using only historical references. It is very risky to prepare a construction cost estimate for an underground project based on generalized cost factors or historical data without thoroughly looking into the details of the ground conditions, scope, and schedule. Staying on Track During Design Several levels of construction cost estimates are typically prepared at various stages during design. These interim estimates are a trending tool for the owner to track the cost as the design advances and to make adjustments as necessary. The designer will be able to see the cost impact of variations in the design and keep a running tally of these changes that allows the design team to help keep the project within the estimated budget during the design process. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 7 90 The cost estimators should help the design team evaluate constructability and identify design features that add costs, as well as make recommendations for how to lower costs while maintaining functionality and schedule. Other feedback that the estimating team can provide the designers includes information about ways to better identify risks and minimize contingencies, particularly related to geotechnical conditions, construction sequencing, and permit restrictions. Because the estimators review each drawing and specification, they also provide feedback for potential inconsistencies or omission in design. For these reasons, the estimator should be involved during design development instead of providing an estimate at the conclusion of the design phase, as is common for aboveground construction. Engineer’s Estimate at 100% Design When the design is 100% complete, the engineer’s estimate is prepared. Typically, this is done using the same documents the contractors use to prepare bids. The cost estimators review the documents just as a prospective bidder would, identifying allowable alternative construction methods, soliciting prices from material vendors and subcontractors, and making judgments on crew sizes, production rates, equipment selections, and supplies. The objective is to arrive at a reasonable bid price, including the anticipated cost for all the work, considering all the conditions and risks allocated to the contractor in the bidding documents, and including overhead (indirect costs) and a reasonable profit. Bid prices are affected by market factors such as the availability of skilled labor, specialized equipment, and materials; the bidding climate; bonding capacity; the current backlog of construction work in the sector; the amount of work expected to be advertised soon; and the contractor’s assessment of the competition. The engineer’s estimate should not be confused with the projected total cost for construction that must, of necessity, consider cost impacts of unforeseeable geologic, weather, economic, or other conditions, the responsibility and cost for which have been allocated to the owner in the contract documents. When the engineer’s estimate is used as a budgeting tool to forecast the total completed contract cost, a construction contingency allowance must be added for these factors. See the “Construction Contingency” section. The engineer’s estimate should not be confused with the projected total cost for construction that must, of necessity, consider cost impacts of unforeseeable geologic, weather, economic, or other conditions, the responsibility and cost for which have been allocated to the owner in the contract documents. PR E P A R I N G C O ST ESTI M ATES The basic steps in preparing cost estimates follow a more or less standard process, beginning with a review of available project information, including contract terms and conditions. Then the cost estimator determines the best approach to constructing the work and begins the detailed quantity takeoff and pricing work. A detailed quantity takeoff is performed on the neat-line quantities, which are the theoretical limit of the work. Due consideration is given to waste and overbreak. Labor, equipment, and material rates are determined by examining labor agreements or prevailing wages and obtaining vendor quotes, including Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Cost Estimates 91 shipping and applicable taxes. The work is then segregated into discrete tasks in a manner that allows for checking, comparisons, and rapid adjustments. This comprehensive bottom-up approach used by contractors is recommended for most underground projects. Rough estimates may use historic cost databases or rely on historic unit price data, but their use during later stages of design is not recommended for several reasons: ■■ It is unlikely that the ground conditions of the prospective project are the same as those of previous tunnels. ■■ The methods used for tunnel construction have significantly changed in recent years, increasing the applicability and productivity of certain methods. ■■ The relationship between fixed and variable costs for each size and length of tunnel is complex and can have a significant effect on the unit cost. ■■ Market factors and other cost drivers such as bidding climate vary from year to year. The cost estimator should contact suppliers when preparing the engineer’s estimate to obtain up-to-date prices for materials and subcontract work. In some cases, owners are hesitant to provide design information to these suppliers under the assumption that providing such information would give the suppliers a competitive advantage over others. However, this concern is unnecessary, since any design information released in gathering data for the engineer’s estimate is unlikely to either affect the contractor’s selections or allow any one supplier a competitive advantage. In many respects, a full disclosure of the design and technical information is deemed essential to obtain the most competitive and fully responsive quotes from prospective subcontractors and suppliers. Qualifications of Estimators Cost estimators should be able to complete many tasks in a manner similar to how the contractor’s estimators will complete them, including planning and scheduling the work; creating and assigning appropriate crews, equipment, and materials; estimating reasonable productivity rates; determining necessary plant and overhead; and including a reasonable profit consistent with market conditions and risks. Successful underground project cost estimators have practical field experience. Cost estimators also need access to a rather extensive library of specialized reference materials and must stay up to date with current technology in the underground industry. Currently, there are no institutions that provide formal education for tunnel cost estimating, and virtually no licenses or certifications are available, although groups such as the American Society of Professional Estimators and AACE International (formerly the American Association of Cost Engineers) offer classes and certifications in cost estimating for conventional structures, and some university programs teach estimating for conventional structures. Only a few published textbooks on this subject are available. Commercially available cost estimating computer programs exist, and although none of them are specific to underground construction, any of the heavy civil estimating programs works equally well for tunnels without any special modifications. The actual cost and productivity data accumulated over many years are one of the important estimating factors used by tunnel contractors when bidding projects. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 92 Chapter 7 Role of the Independent Estimator Cost estimates prepared by representatives of the design team are useful in providing immediate feedback on design features. However, because they are part of the design team, sometimes these estimators may feel pressure to keep costs below a certain amount, thereby losing the perspective of a contractor charged with estimating the design shown on the bidding documents. To counteract this potential bias, some owners require that an independent outside estimator review the engineer’s estimate at each of the various stages of design development. We recommend this approach as part of a robust quality control program. F A C TO R S A FF ECTI NG TH E COST OF U ND ER G R OUND C ONST R UC T ION Because underground construction is much different than aboveground projects, it is important for all project participants to understand the factors that affect the cost of underground construction. The single most important factor, of course, is the scope of work shown on the drawings, the length and diameter of the tunnel, the characteristics of the shaft or portal used to provide access, and the anticipated geotechnical and site conditions. Following are other important factors that affect cost: ■■ Restrictions placed on the construction, usually by third-party agreements or environmental requirements. Such restrictions—which may include work hours, craft wage requirements, environmental restraints, and potential interference with adjacent contractors—affect the efficiency of production. ■■ Contract terms and conditions. Contract terms, particularly those related to payment such as timing and retention, affect cash flow, and may require contractor financing that would affect the bid price. The time-related costs associated with an underground project can be a significant percentage of the total contract price. Because of the inherent uncertainty of underground work, changes can be a frequent occurrence. Contract terms that recognize time-related costs as a separate element of changed work and avoid compensating time-related costs as a percentage of direct costs generally result in less bidder contingency. See Chapter 11. ■■ Reputation of the owner. An owner’s history of unreasonableness, such as withholding or delaying payment on uncontested change orders and withholding or delaying payment on valid claims, will dramatically affect contractors’ willingness to bid. Also a factor is the owner’s reputation for fair resolution of disputes and whether the contract includes provisions for partnering and/or alternative dispute resolution. See Chapter 10. ■■ Time for completion (escalation). If the construction period is long, more money will be factored into the bid for inflation. An owner can minimize some of the economic uncertainties (and the contingency included for escalation) by including a price adjustment provision in the contract for cost elements that are especially impacted by price escalation. Examples include labor, steel, and fuels. Such a provision will serve to allocate some of this risk to the owner. ■■ Time for completion (liquidated damages). If the owner’s contract schedule is too aggressive overall or it has largely unattainable interim milestone dates, contractors may view these conditions as unattractive. To justify the expense of preparing a bid and make the project attractive enough, experienced contractors may add Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Cost Estimates 93 contingencies to offset exposure to potential liquidated damages. This situation can reduce competition and may even result in a contractor withdrawing from bidding. ■■ Availability and performance of craft labor in the project area. In an area where there is considerable underground work underway, a shortage of qualified underground craft and supervisory labor may occur. Alternatively, projects constructed in areas where there is a limited pool of skilled workers may have to include costs for camps, relocation, and incentive payments to obtain qualified workers. ■■ Level of detail in the geotechnical work performed by the owner. If an owner conducts a detailed geotechnical investigation, there is less risk and uncertainty associated with the ground. Particularly beneficial is the use of a comprehensive geotechnical baseline report (GBR) as discussed in Chapter 3 (see also Essex 2007). Contractors heavily rely on GBRs and the baselines defined therein. ■■ Fixed and variable costs. This factor relates primarily to tunnels mined using tunnel boring machines (TBMs). Fixed costs on TBM tunnels include the setup expense; the cost of machine procurement; and the time it takes to assemble, turn under, drive far enough to assemble the trailing gear, and service the machine. The variable cost is the cost per unit of length to excavate and line the tunnel. Some of these costs are a function of the tunnel length and diameter (lining systems, removal and disposal of excavated material, etc.). Other variable costs are a function of the tunnel length and generally independent of the diameter (linear plant, utilities, instrumentation, time-related operations costs, etc.). TBM-driven tunnels are usually more cost competitive when they involve drive lengths long enough to allow the relatively high fixed costs to be amortized over a long drive. In addition, because of the heavy investment in plant and equipment, most TBMs are operated around the clock as much as possible. Although multiple shorter headings may make for a shorter construction period, the additional setup costs must be accounted for in determining cost effectiveness. The number of headings required is sometimes governed by contract and schedule objectives other than cost effectiveness. ■■ Contract package size. Some evidence exists that having a contract in one very large package is counterproductive, because it may limit the number of bidders to those that are financially strong enough to provide surety bonds and other key resources, which restricts competition. To maximize competition and to increase participation, projects may (to the extent possible) be divided into smaller, strategically combined contracts that allow smaller firms to bid on work that is their specialty. Such packaging approaches require that contract interfaces be defined and managed by the owner or its construction management staff, thereby allocating another risk on the owner. E S TA B L I S H I N G TH E CONTRACT TI M E OF P ER FOR MA NC E For most underground construction projects, the contract time of performance can only be established from the engineer’s estimate after considering all the permit and real estate availability and other contract restrictions and evaluating the sequence and production anticipated for all elements of work. In the event that different methods of construction may be used, depending on the contractor’s preference, the contract time should allow for all feasible methods that have been previously evaluated through a structured constructability Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 7 94 analysis. This is the time to make realistic assessments of production rates and determine their impact on the overall schedule. In the event that there are fixed dates for completion of certain work items (e.g., resulting from either court-ordered consent decrees or politically driven revenue operation dates) that the engineer’s estimate finds difficult to meet, the design engineer should adjust contract requirements, real estate availability, scope of work, or other portions of the work to produce a realistic contract time. Bidding documents released with an unrealistic completion date risk attracting a limited pool of bidders and can result in performance problems for the contractor unlucky enough to win the bid without fully appreciating the means and resources needed to successfully complete the work on a compressed schedule. Bidding documents released with an unrealistic completion date risk attracting a limited pool of bidders and can result in performance problems for the contractor unlucky enough to win the bid. CO N TI N G E N C I ES Contingencies are the amounts (costs) included in estimates to account for unknowns. It is useful to think of a contingency in three parts: design, contractor, and construction. Design Contingency As cost estimates are completed at the various stages of design, their accuracy is affected by undefined aspects of the work. A design contingency can be used to allow for incomplete design details and known unknowns such as environmental constraints and site access restrictions. These allowances should be higher at early stages of design and approach a very low amount as the design is closer to being final. Both AACE International and the U.S. Department of Energy have established recommended guidelines for showing contingencies at various levels of project definition (see Table 7-1). Contractor’s Contingency Contractors include a contingency in their bids to account for the potential risk that events allocated in the contract to the contractor will occur. Such events may include those related to certain geologic uncertainties (e.g., pre-excavation or water control grouting), material price volatility, and estimating uncertainties. Contingency amounts are universally considered as cost and accounted for as such. Many contractors list the anticipated risks, estimate the likelihood of such risks occurring, calculate the expected cost and schedule impact if they were to occur, and then base the contingency on this analytical approach. Additional issues that factor into contingency assessments include change order and differing site condition risks, payment risks, schedule risks, subcontractor availability, labor shortages, and productivity. Construction Contingency On receipt of bids, many owners adjust their budgets to reflect the low bid price, then add a construction contingency to allow for future costs to the owner such as change orders and extra work. Owners should recognize that a typical underground contract might involve more risk being allocated to the owner (e.g., for differing site conditions) than would an Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Cost Estimates 95 TABLE 7-1 Contingency cost estimating methods Project Definition, % Class End Usage Description Contingency Range, % 5: Order of magnitude 0–2 Budget and feasibility Information delivered from outline of proposed plan 30–35 4: Intermediate 1–15 Better-defined budget Information description, layout, size; outline design criteria, with descriptions of soils, rough sketches of alignment, and construction type 20–30 3: Preliminary 10–40 Established probable costs of project based on available information Detailed understanding of scope, alignment, pipe size, construction methods, and local conditions; complete geotechnical interpretive and data reports 10–20 2: Definitive 30–70 Probable cost of project Fully developed design, data, specifications outline, terms, and conditions review 10–15 1: Tender or final bid estimate 50–100 Solicit bids Complete bid package: terms and conditions, front ends, all specification sections, drawings, supplies, information 5–10 Adapted from U.S. Department of Energy 2004 aboveground project. Accordingly, the owner might wish to increase the construction contingency, particularly if minimal subsurface investigation has been conducted prior to the bid. Statistical Methods As discussed in Chapter 4, for many years the rule of thumb for underground projects in the United States has been to add a flat percentage to the low bid number for the construction contingency. This was based on a USNCTT (1984) study that reviewed 84 tunnel projects and found that the average added cost was about 3%–4% of the bid price; while four difficult tunnels raised the overall average to 12%. The USNCTT study suggested that a prudent owner’s contingency would be between 5% and 15% to conservatively account for claims and extra work. However, the preparation of systematic risk registers for many underground projects now allows cost estimates to be based on the likelihood and severity of the various identified risk events involved. As discussed in Chapter 4, many risk assessments are primarily conducted to provide qualitative input to the risks and thereby focus mitigation efforts; however, Monte Carlo simulation methods allow for a quantitative measurement of the expected impact of the risk events. This impact can be measured in cost, time, or both. The resulting output enables the prediction of the total project cost to a specified confidence level (e.g., 90%), making it unnecessary to use arbitrary percentages for contingency. However, it does require that risk registers and cost factors be continually updated as design elements are finalized (e.g., it is expected that the identified risks will go down as additional subsurface investigations and more design or construction work is completed). Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 7 96 3.17 5.0% 1.0 Statistics Total Project Risk Cost 7.92 90.0% Total Project Risk Cost 5.0% 0.8 0.6 0.4 0.2 0.0 0 5 10 15 20 Values in Millions 25 30 Cel Combined Model Input Minimum 2,031,170.53 33,666,948.86 Maximum 5,042,780.81 Mean 3,816,713.77 Mode Median 4,651,673.73 1,672,478.64 Std Dev Skewness 1.8761 10.0873 Kurtosis Values 100000 Errors 0 0 Filtered Left X 3,173,857.32 5.0% Left P 7,916,148.91 Right X Right P 95.0% Dif. X 4,742,291.59 Dif. P 90.0% 1% 2,816,593.53 5% 3,173,857.32 10% 3,392,254.59 15% 3,564,608.56 20% 3,714,543.95 25% 3,858,018.26 30% 4,002,944.54 35% 4,147,897.52 40% 4,300,206.72 45% 4,468,605.60 50% 4,651,673.73 4,853,920.82 55% 60% 5,075,618.72 65% 5,315,979.06 70% 5,578,343.22 75% 5,867,334.80 80% 6,193,688.71 85% 6,582,922.71 90% 7,076,788.42 95% 7,916,148.91 35 99% 11,202,121.25 Courtesy of Schnabel Engineering FIGURE 7-1 Quantitative risk study Figure 7-1 represents an example of a quantitative risk study completed on a project to determine the amount of contingency for the owner to carry in the budget. This example shows the risk cost on the x-axis and the confidence level on the y-axis. In this example, the 95% confidence level for risk contingency is $7.92 million. Some contractors use a simpler method, which includes a room full of very informed people and the chief estimator doing a what-if analysis on certain specific activities in the cost estimate to get a range. For example, if the detailed cost estimate for a tunnel project has a crew size of X − labor and a production rate of Y − linear feet per day, the estimator can generate a sensitivity study by evaluating the effect on total cost if X and Y varied within the identified range. This method uses the real basis of the estimate to calculate cost variability and derive the contingency. Disclosure of Engineer’s Estimate Many owners have an agency policy restricting the publication of the engineer’s estimate until after the receipt of bids. Other owners are required by law to disclose the engineer’s estimate. Disclosing the estimate might help attract bidders and ensures that bidders are aware and capable of providing any required bid bond. Full disclosure of the engineer’s estimate is, therefore, recommended. CO N C LU S I O N S AND RECOM M END ATI ONS This chapter clearly differentiates between cost estimates, which are prepared early during design; the engineer’s estimate, which is prepared at the end of design; and the estimated Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Cost Estimates 97 total project cost, which includes the low bid price, the owner’s contingency, right-of-way and acquisition costs, environmental and community mitigation costs, design and construction management costs, and owner management costs such as owner-controlled consolidated insurance programs. Owners considering construction of an underground project should plan for the cost estimating process by considering the various stages when estimate information will be required to support the budgeting and design effort and how that information will be acquired, processed, and packaged into estimates. ■■ Recommendation 7-1: The budget for an underground project should not be established on the basis of generalized cost factors, but only after developing a bottom-up cost estimate that considers the project scope, ground conditions, required schedule, and feasible methods of construction. ■■ Recommendation 7-2: The design development for an underground project can be more effective if the cost estimator is an integral part of the design team instead of being considered as a follow-on activity. Using independent cost estimators can be an effective method of providing quality control. ■■ Recommendation 7-3: The contract time of performance should be finalized after the engineer’s estimate is complete and should represent a realistic estimate of the time necessary to complete the work using any allowable methods. ■■ Recommendation 7-4: Risk and uncertainty should be applied to determine a range of risk contingencies for cost (and time) and should be included for each phase of project development and transparently reduced as a function of remaining risks as the project progresses and uncertainties and risks materialize. ■■ Recommendation 7-5: The engineer’s estimate should be published in the bid advertisement. R E FE R E N C E S Essex, R.J., ed. 2007. Geotechnical Baseline Reports for Construction: Suggested Guidelines. Reston, VA: American Society of Civil Engineers. U.S. Department of Energy. 2004. Cost Estimating Guide for Program and Project Management. Publication G 430.1-1X. Washington, DC: U.S. Department of Energy. USNCTT (U.S. National Committee on Tunneling Technology). 1984. Geotechnical Site Investigations for Underground Projects. Washington, DC: National Academy Press. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 81 Schedules I N TR O D U C TION Schedules are valuable tools for the planning, design, and construction of any capital project, but only if they are prepared carefully, specifically, and realistically by persons who are well-informed about the work and the planned means to accomplish it. It is crucial that all project stakeholders are aware, at all critical times, of project development and progress. The most common and efficient way to ensure that this is accomplished is by requiring the project stakeholders (owner, lender, insurer, contractor, engineer, construction manager, etc.) to regularly meet, discuss, and report on the project progress against the schedule. Schedule management is important to governments and public agencies that depend on timely completion to meet critical scheduled commissioning or in-service timelines. Therefore, schedule management is integral to construction of any asset, particularly underground infrastructure. This chapter explores the need for a realistic schedule, describes schedule preparation, addresses some features of underground scheduling, and summarizes the various schedule models that can be employed on an underground project. In addition, milestones, substantial and final completion, liquidated damages and how they should be calculated, scheduling constraints, and specifications are discussed. The chapter concludes with a discussion of other scheduling issues, such as cost and resource loading, owner’s approval of a schedule, subcontractor scheduling issues, and forensic scheduling, all of which frequently arise on underground construction projects. R E A LI S TI C SCH ED U L E: D ESI GN/CONST R UC T ION/T EST ING /C OMP LET ION The importance of developing a realistic project schedule cannot be overemphasized. The schedule is used to plan the work, track progress of the work, determine when additional resources are needed, coordinate interfaces between construction and equipment procurement contracts, determine when permits and rights-of-way are needed, and evaluate delays resulting from differing site conditions and owner-initiated extra work. It identifies the Image © Washington Metropolitan Area Transit Authority Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 99 100 Chapter 8 critical path and near critical paths that, if delayed, would result in overall delay to project completion. Baseline schedules are also used to determine cash flow predictions and can aid in fulfilling financing requirements, such as bond, insurance, and concession sales. Schedule and costs go hand-in-hand, affecting the needs and interests of all parties involved in the work. A schedule is initially a logical model of how a project is planned to progress and later becomes an as-built record of how a project was completed. A comprehensive schedule with estimated time durations should be developed during the early stages, even if the project is not defined enough for the scheduler to predict realistic time durations for the activities. Then, as the project develops and more of the scope restrictions and work sequences are known, the schedule must be reevaluated and updated with greater detail. To be of maximum benefit, the schedule should be a living document that is constantly used and revised. Schedules must be realistic and prepared by persons who understand the scope and methods for performing the work. The most important aspect of preparing a realistic schedule is simply understanding the work itself. It does not make sense to handicap the scheduling tool by introducing artificial restrictions or unrealistic expectations. These restrictions and expectations almost always create problems later in the project in the form of delays, claims, and higher costs. If possible, the owner should actually build float (additional time) into the schedule to minimize the schedule effects of unforeseen events and offset any schedule slippage. Unrealistic schedules are often the result of external forces such as the political desire to have a project completed in time for an upcoming event or election. These external forces should be taken seriously, but should not be allowed to influence the schedule in a way that makes it unrealistic. Rather than artificially truncating the contract time, available options include making adjustments to contract requirements, real estate availability, scope of work, or other portions of the work. The schedule information that is initially released to the public is what will have to be defended throughout the life of the project, so owners should feel comfortable and confident that the cost and schedule are realistic, defensible, and harmonious with one another. Underground schedule management becomes important during the execution phase for managing scope changes and add-on elements. To be useful, baseline schedules must be adjusted to incorporate schedule changes for approved time extensions, whether resulting from change orders or force majeure causes. Only by using a schedule that correctly models the contractor’s plan for the work and incorporates the actual progress to date can time impacts of proposed changes, differing sites, and other delays be determined. Management of the schedule requires all project participants to be informed regarding real-time status of the project, potential delays that might impact schedule compliance, and the need for recovery plans. Only by using a schedule that correctly models the contractor’s plan for the work and incorporates the actual progress to date can time impacts of proposed changes, differing sites, and other delays be determined. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Schedules 101 S C H E D U L E P REPARATI ON As the schedule is developed, a timetable for the work emerges. The scheduler divides the work into discrete activities and assigns completion times for each. Activity durations are quantified, and anticipated production rates are determined, which are then applied to the activities and quantities. The result is a model that shows all the elements of the project, the sequence by which it is expected to be constructed, and how these elements may be used to calculate the cost of the work. To develop the schedule model for an underground project, the scheduler needs to summarize the quantities of work in many categories, then develop a minimum-sized crew of workers for each activity on the schedule coupled with an expected duration to complete the activity. The staffing is determined by the actual work to be accomplished and the local labor staffing requirements. After the crews are established, the crew productivity is determined. If the crew productivity does not support the expected duration for any given activity, then the crew size must be increased or decreased accordingly to achieve the desired production rate. This may be accomplished by varying quantities of resources to be assigned to the given activity, specifically labor and equipment, and/or increasing the work duration within a 24-hour day, which includes the use of overtime or additional shifts. If the production rate for a given activity cannot meet the expected duration by increasing resources, then the duration of the activity must be adjusted to accommodate production limitations. Labor makes up close to 30% of the total cost of most tunnel projects, so the accuracy of labor projections is particularly important. Activities that may require overtime or additional crew elements must be identified, as they have a large impact on the cost. Indirect and overhead costs are time-dependent and the total project costs are therefore a function of the schedule duration. E V O LU TI O N OF U ND ERGROU ND CONSTR UC T ION SC HEDULING NEEDS Underground construction projects are often coupled with additional ancillary facilities (e.g., near-surface structures, pumping facilities, support buildings, ventilation structures, and rail stations) that work with the underground construction to achieve the overall desired function. These ancillary facilities may be constructed under contracts independent of the underground work or built in conjunction with the underground work under the same contract. When underground projects include ancillary elements, it becomes more complicated to define a critical path comprising the activities that have no float. A simple underground construction project is linear. This is typically because the nature of the work requires that certain activities be complete before the next activities can begin. For example, on a simple tunnel project, access to the tunnel must be constructed first, either via portal or shaft excavation, to be followed by the tunnel excavation itself, and ultimately followed with the construction of any final concrete linings. Each major construction sequence depends on the completion of the prior work and results in a linear progression within the project schedule. It may be feasible to concurrently construct permanent facilities while excavation is still underway only in large-diameter tunnels. With the addition of ancillary facilities, an underground construction schedule can no longer be accurately represented using a simple linear approach. Although it is true that certain Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 102 Chapter 8 underground construction activities retain a linear relationship, construction of other structures, including drop shafts, adit connections, diversion structures, and the like, imposes additional constraints on the sequence of construction, making for the development of a more complex construction schedule with multiple logic ties and potentially multiple critical paths. With the addition of more and more ancillary facilities to an underground project, the underground construction may not necessarily remain on the overall critical path. As all project elements are required to be completed to achieve the full functionality, additional near-surface excavations, structures, and tie-ins can drive the schedule and become still more critical. These additional construction elements can easily become the genesis of multiple critical paths within the project schedule, and substantially complicate the contractor’s ability to remain focused on a single construction activity or construction sequence for schedule improvement. The delivery method used for an underground project has a direct effect on the project schedule development. With a traditional design-bid-build (DBB) delivery method, the project schedule can be based on the physical construction activities as the design of the permanent facilities is already completed before the job is awarded. A design-build (DB) delivery method, however, introduces far greater scheduling complications. With the DB method, the project schedule not only must include the physical construction activities but must also include all engineering activities that comprise the development and approval of the project design. The schedule must include a realistic time frame for developing the design, obtaining approval of the design, and obtaining permits. Additionally, it is not unusual in the case of transit projects to set aside considerable post-construction time for testing and commissioning of equipment and systems. The implementation of a successful schedule for an underground project using DB relies on the contractor’s ability to coordinate design with construction and understand the governing local permitting process, as well as on its expertise in the construction to be performed. Any schedule time lost during the design of the project can only be recovered during construction, when the cost of so doing is much higher, making the scheduling of the design element durations extremely important. To help develop realistic durations required for this design, it is paramount that the owner clearly and concisely portray its expectations and processes for design development and approvals. The implementation of a successful schedule for an underground project using DB relies on the contractor’s ability to coordinate design with construction and understand the governing local permitting process, as well as on its expertise in the construction to be performed. S C H E D U L E M O DEL S F OR U ND ERGROU ND P R OJ EC T S Several different schedule models can be used to list, quantify, and illustrate how work is performed in underground construction, including the critical path method (CPM); linear schedules (time/location diagrams); and bar charts, also known as Gantt charts. Critical Path Method CPM is one of the most widely used scheduling techniques in the underground construction industry. A CPM generates a graphical view of activities versus time and identifies Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Schedules 103 CPM 101 CPM is a detailed, mathematical system of linking individual activities as a schedule. It is extremely useful for showing logical relationships between schedule activities (i.e., which activities must be completed before the following activities can be started and which activities are independent of others). In CPM, individual activities are logically connected, and duration is assigned to each one. Then mathematical calculations are performed both forward and backward through each path of the schedule to determine the longest duration, the critical path. While the forward calculation assigns early start and early finish to each activity, the backward calculation assigns the late start and late finish to these same activities. The mathematical difference between the early and late start and finish of each activity is the float for these activities. Activities on the critical path have zero float, which means that a delay to any activity along the critical path will delay the project. critical activities requiring attention so the project can be completed on time. Since the 1960s, most engineers and contractors have used CPM scheduling to plan and monitor projects (see the box “CPM 101”). Most computer software scheduling programs are based on this method, including Oracle’s Primavera P6 and Microsoft Project. Periodic (normally monthly) updates are usually performed so that all project participants understand the progress of the project and the plan going forward. These updates can be used to schedule certain interim milestone events such as testing and training activities, inspections, and critical turnovers. The owner or construction manager should verify that the schedule updates represent actual field progress and should question updated activities that appear to be inaccurate. CPM can be applied to both simple and complex projects. It can also be used to calculate and display costs and resources in a time-dependent way, which adds to the usefulness of the tool and helps account for its widespread acceptance and popularity. However, even when CPM’s logic and time functions are combined with a graph of the schedule, such as a Gantt chart, it is not possible to obtain a clear visualization of the linear nature of underground civil construction projects. Linear Schedule Because of the linear nature of underground projects, a linear schedule or time/location diagram, is often used to supplement a CPM schedule for the tunnel excavation and lining activities. As illustrated in Figure 8-1, the linear schedule graphically depicts both the planned and the actual progress, which allows managers to quickly evaluate performance. A clear picture of logic, time, and distance is essential for planning and managing underground projects. Together, CPM and a linear schedule create this picture. When these schedules are overlaid on a plan of the surrounding communities, the designer can predict where the impacts from the construction will most likely be felt and for how long. Similarly, the contractor can understand the rationale for restrictions based on geographical locations that have been included in the contract specifications and be more sensitive to the needs of the surrounding community. Additionally, key submittals, materials, equipment, and subcontractors can be identified, scheduled, and managed from this graphic depiction of the entire project. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. FIGURE 8-1 Linear schedule Chapter 8 Courtesy of GraphicSchedule.com 104 Schedules 105 Bar Charts A bar chart (Gantt chart) is another project planning tool that can be used to represent the time-dependent activities, quantities, and sequence of project tasks. Bar charts are the most simple and easiest way to generate construction schedules. They are widely used because of their simplicity. A bar chart is used to list activities—specifying the start date, duration of the activity, and completion date of each activity—and then plot these activities on a project timescale. The detailed level of the bar chart depends on the project complexity and the intended use of the schedule. Variations of the bar chart schedule, such as the linked bar chart, commonly use arrows and lines to tie activities and subsequent items, specifying the successors and predecessors of every activity. Previous activities can be linked, one to another, to demonstrate that one activity must be completed before the other activity can start. Bar charts are simple to understand and easy to construct using task-specific software such as a simple Excel spreadsheet. In bar charts, time is indicated along one axis and activities along the other. Each task is assigned a row, and the length of the activity is indicated by the length of the bar in that row. Tasks can run in sequence or concurrently. The project sequence evolves to provide a time-scaled picture of how the scheduler sees the project being built. Experienced schedulers often add illustrations, notes for key events, and other data needed to fully express the project features. Bar charts are typically used early in project development to represent specific activities for weekly staff updates and for briefing executives, or for less complicated projects. When projects become too complex, bar charts may not be the best tool. For sequencing and critical path analysis, the CPM is a more powerful tool for handling dependencies, restrictions, and milestones, and for projecting completion time. For reporting and visual simplicity, most CPM programs allow the schedule to be output in bar chart format. Bar charts can be prepared by any staff member and readily capture as-built information and well-defined hold points. Bar charts can be used to show the amount of resources needed. Resource aggregation is done by adding resources vertically in the schedule. The purpose of this aggregation is to estimate work production and establish estimates for labor and equipment hours. I N TE R I M M I L ESTONES: SU BSTANTI AL /FINA L C OMP LET ION The owner agency can use interim milestones as tools to help manage the project. A milestone is any date the owner chooses to establish as having significance to the project. For example, it may be important to manage the interface between two or more adjacent construction contracts. Or an owner agency may expect the project to be completed at a specific time, so the project can start performing its intended function. To accomplish this, a project may potentially be brought online in phases, with some portions being complete by certain dates. Scheduling interim milestones should be realistic; unrealistic milestones can cause contractors to include excessive acceleration costs in their bids or limit the number of bidders because of the risk (and penalties) of missing the required completion date. Also, interim and final milestones could relate to truly significant dates or events and not be indiscriminately used. For example, if the owner has obtained an easement agreement with a third party to occupy its land during construction, then an interim milestone should be included within the schedule to drive the completion of the work on this land prior to or Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 8 106 on the date depicted within the easement agreement. This work completion then allows the owner full use of this portion of work prior to overall substantial completion. Substantial completion is when the work, or majority of the work, is ready to be used for its intended purpose by the owner. Final completion is usually defined as that point at which all required work and obligations of the contract have been completed, the punch list is complete, no liens are outstanding, all warranties are submitted, there are no outstanding claims, operations and maintenance manuals are submitted, and record drawings are complete. The owner usually establishes many work days or calendar days for both substantial and final completion. To use these milestones as effective management tools, it is common and reasonable for the owner to assign liquidated damages to these milestones. As liquidated damages may be assessed for missing a milestone, it is critical that the owner clearly define what constitutes interim milestones, substantial completion, and final completion. A generic definition for substantial completion is not sufficient to generate a meaningful project schedule. Within the schedule, project float typically comes from a critical path running through final activities that are logically tied to substantial completion (not final completion). With a clear definition of substantial completion, the contractor will be able to tie only construction activities related to meeting this definition of substantial completion and be able to portray a more accurate schedule as the project progresses. Having all activities tied to substantial completion when it is not necessary will impose an unrealistic schedule and can cause the implementation of acceleration when it is not warranted. For example, if landscaping during final restoration is tied to substantial completion, the duration of this activity affects the completion of the project by default even if its physical implementation has no effect on the intended function or owner’s beneficial use or cannot realistically be accomplished because of seasonal or other similar issues. L IQ U I D A TE D D AM AGES Liquidated damages is a term used to describe a contractual clause that establishes damages to be paid to one party if the other party should breach the contract in a specific manner, commonly late performance. These clauses are used to provide an incentive for contractors to perform work efficiently to complete construction on time, and to provide a right for owners to claim compensation at an agreed rate for their proven estimated loss that might be incurred as a result of late construction completion. Even though an owner may want to punish a contractor for late performance, a liquidated damages clause cannot be used for that purpose. It is important when drafting a liquidated damages clause to limit the extent to which it might be interpreted as a penalty. This all comes down to the drafting and the underlying methodology for valuation of the liquidated damage rates in the contract. The owner must set the per diem liquidated damages at a reasonable estimate of the actual damages (costs) the owner will incur if the contractor is late in finishing the work. There must be a good faith effort to estimate and document these costs well in advance of contract award. Unrealistically high liquidated damage amounts can and will be challenged as punitive measures. The costs an owner might incur for late delivery of a project vary. Examples include the costs of owner-furnished insurance, construction management and design services during construction, fines from regulatory agencies for missed consent decree dates, supply Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Schedules 107 of alternative services, potential damages to follow-on contracts, and the owner’s own extended labor and material. The owner should communicate to the bidders, in the contract documents, the reasons why liquidated damages would be imposed so the contractor can schedule the work to avoid triggering the damages. The added benefit to specifying liquidated damages in the contract documents is that bidders know the cost for which they will be liable if their own actions cause them to miss required contract completion dates. This certainty is viewed as a risk management factor for the bidders. If there were no liquidated damages provision, the owner may be entitled to assess actual damages under the “time is of the essence” provision, and to the extent that these actual damages are unknown at the time of contract award, this uncertainty would likely cause bidders to refrain from bidding on the work, bonding companies to not issue bonds, or bidders to include a contingency in their bids for this uncertainty. The owner would then effectively pay for that risk even if it never materialized. Because the owner is allowed to collect damages for late completion, there is much discussion in the industry about whether an incentive should be offered to the contractor for early completion. An owner should entertain using incentive bonuses only if there is a true benefit to the project or program. The owner must also be careful that an incentive does not lead the contractor to take measures that might lead to an early finish but cause collateral damage on concurrent contracts or third-party agreements. If the owner chooses to use incentive bonuses, they must be achievable, and the dollars involved must be large enough to influence the contractor’s behavior (see the “Float” section). There are numerous examples where incentive clauses have contributed to reopening of major highways earlier than planned, thus lessening the impact on the motoring public. For example, after the 1994 Northridge earthquake damaged Interstate 10 in Los Angeles and after 2007 structural damage to Interstate 580 in Oakland, California, both highways were opened earlier than scheduled because of the attractive and attainable incentive clauses. On DB projects, to the extent that these incentives are driven by the design side of the DB team, they have even been shared with the designers. S C H E D U L I N G CONSTRAI NTS A schedule constraint is a fixed imposed date or a limitation placed on a project schedule that affects the start or end date of an activity. The owner can use scheduling constraints as tools to manage the work or to reflect restrictions placed on the work by the physical layout of the project, the contracting strategy, or third parties. Whenever constraints are used, they should reflect project realities. Constraints on a project schedule come in many forms. They can be physical site constraints (e.g., site A is available only from date X to date Y or only for Z calendar days), work sequence constraints (e.g., tunnel A must be constructed before tunnel B), or work hour constraints (e.g., work can only be carried out from 7:00 am to 10:00 pm). The owner must realize that each constraint placed in the contract increases the cost of performing the work. These constraints should not be confused with interim milestones. Interim milestones are used to represent the completion of specific construction activities or portions of the work, capable of being used by the owner for its intended function, prior to substantial completion of the overall project. Failure to meet an interim milestone may impose Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 8 108 additional costs to the owner and, therefore, should be made part of the contract liquidated damages clause. Owner-imposed constraints and work restrictions should be explained to the bidders so that the contractor can schedule the work in accordance with the limitations. Additionally, these constraints should not impose undue hardship on completing the work and not impose unrealistic work sequences to meet the constraints. A contractor is entitled to plan and schedule the work to minimize costs unless the proposed plan violates the constraints defined in the contract. The contractor’s ability to complete the project on time or on budget may be threatened if the scheduling constraints work against the contractor’s goal of fully utilizing work crews with a minimum of idle time or out-of-sequence work. Both contract parties can also use constraints to enhance their ability to manage the claims process. Constraints can be artificially inserted into a schedule to consume or hide float or to complicate the critical path and make it appear that all paths are critical or subcritical, thus laying the groundwork for future disputes. Scheduling specifications must recognize this possibility and be structured to minimize or eliminate these distortions. However, if a constraint is not defined in the contract, it should not be allowed in the schedule. Constraints that arise after the bid should be recognized by the owner as a change to the contract and dealt with in an equitable manner consistent with all other contract changes. S C H E D U L I N G S PECI F I CATI ONS By using clear scheduling specifications, the owner can help ensure that the contractor’s schedule realistically reflects the project requirements, the contractor’s approach to the work, and the status of the project. The contractor’s schedule is a plan that demonstrates to the owner that the contractor understands all the elements and restrictions and has thought through the resources that must be brought to bear to complete the work. It is also a communication tool that enables all project participants to understand the status of the project and the plan going forward. The schedule is the primary tool used to demonstrate the impact of any changes or challenges encountered by the contractor. A realistic schedule is an essential document needed for understanding the impacts of change orders, claims, and outside influences while, at the same time, aiding in recovery and, if necessary, the adjudication of any disputes. Failure to pay strict attention to the scheduling specifications will make the evaluation of changes and impacts to the project exceedingly difficult. In addition, on projects where the owner is providing materials, site access, construction management services, or anything else to the contractor, the contractor’s schedule helps the owner to know when to provide these items. Typically, a limited or initial construction schedule is due 30 days after notice to proceed (NTP), with the more detailed complete project CPM baseline schedule following within 90 days after NTP. The initial or preliminary schedule should adequately detail the project work from NTP through the anticipated acceptance of the project baseline schedule and reflect the remaining portion of the contact in enough detail to demonstrate that the contractor’s work plan will meet the contract completion dates. The time frame requirement within the specifications on receiving the baseline schedule after NTP should be based on the size and complexity of the project, number of constraints, anticipated number of Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Schedules 109 owner reviews required, and delivery method used. Not all projects are equal in regard to scheduling complexity. Requiring a detailed baseline schedule within the standard 90 days after NTP could result in a document that is not as representative of the proposed work as one that the contractor has had more time to evaluate and to obtain key subcontractor and supplier input. The deadline (typically specified in days following NTP) for submission of the baseline schedule must take into account the complexity of the project, or the product will be of limited use. It is also recognized, however, that the bidders prepared some form of a schedule in preparation of their cost estimates. The scheduling specifications should address or provide the following: ■■ Method of scheduling and the software that the owner wants to use (with updates) ■■ Detailed activity descriptions, number of activities, coding, maximum duration per activity, logic details, and so forth ■■ As an option, a linear schedule can be required to provide a simple overall progress view of long-duration tunnel activities ■■ Report formats and frequency of schedule review ■■ Process and documentation requirements for schedule submittal and approval and/ or acceptance ■■ Use of milestones, restrictions, or constraints ■■ Frequency of and requirements for updates, including narratives and/or schedule review meeting ■■ Scheduler qualifications ■■ Requirements for sign-off by major subcontractors and suppliers, especially ones on or near the critical path ■■ When a recovery schedule is required and connection to the contract changes clause ■■ Frequency of and requirements for schedule revisions and updates In addition, the specifications should be clear that, when a delay event actually occurs, contract time extensions are to be calculated using the most up-to-date schedule. This is important, especially for times such as when an owner is delayed in granting approval of time extensions. Extension-of-time activities inserted into an incorrect schedule update can skew the critical path and any subsequent schedule analyses. Owner agencies should be specific on scheduling and coding requirements, so that they can match internal project controls. Failure to submit schedules in a timely fashion can confound contemporaneous schedule analyses, and as a result, some owners include provisions in the specifications tying the contractor’s progress payments, initial and subsequent, to the receipt of the required schedules. This is an effective way to ensure compliance and also forces the contractor to devote the required resources to developing and using the schedule as a meaningful management tool. See Chapter 9 for further detail. Most scheduling provisions require the incorporation of normal weather delays into the work plan. Most underground projects have durations of several years. Despite the impression that the weather cannot directly impact a tunnel because the critical path work is underground, weather can still cause delays or difficulties getting people and material to and from the site, which immediately and directly affects the underground work, and also directly impacts the critical path. It is common for the owner to include a list of weather delays in the requirements of the work, depending on the location of the project. The contractor must then allow for a certain number of normal weather delays that must be Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 110 Chapter 8 exceeded before a force majeure time extension request may be made. (See Chapter 11 for a discussion of weather delays.) A final thought on the scheduling specifications is that any requirements that impact the schedule and cost of the project should be clearly stated in the scheduling specifications and nowhere else, so that they are easy to find and implement. These items include completion times, interim milestones, work sequence restrictions, constraints, work hours, liquidated damages, and incentives, as well as a robust schedule development and management process. CO S T- A N D R E SOU RCE-L OAD ED SCH ED U LES The benefits of cost loading a project schedule are greatly debated. Those in favor believe that it is more efficient to use the schedule for tracking job progress and making payments. They argue that this approach ties payments to job progress, and both job reporting and payments are more realistic with a single document that has dual uses. Those opposed to cost loading believe that using the schedule for payment purposes converts the critically important project schedule from an intensive job planning tool to a payment tool. The risk is that the owner may never see the real job schedule. In many cases, cost loading cannot accurately be reflected in a construction activity based on physical percent complete, and to do so requires continuous manual input and corrections to logic paths, resources, and the corresponding cost loading for each activity. In addition, cost-loaded schedules can include resource restrictions that can create phantom float—the difference between the total float in a resource-constrained schedule with all the original logic ties and the same schedule with additional logic ties inserted by the scheduler to account for resource constraints. Detailed cost-loaded schedules that are used for making progress payments require a large maintenance effort on the scheduler when providing period updates. The time used to perform this cost maintenance (i.e., adjustments and redistribution to new and changed activities), and often to revise hundreds of cost values on a monthly basis, could better be used to ensure that the physical progress is accurately reflected, and future work is sequenced according to the work plan. For these reasons, it is not recommended that a detailed cost-loaded schedule be used for underground projects. If the owner needs a forecast of the cash flow for the project, the baseline schedule can be cost-loaded to produce the needed data and then payments made using other methods, such as schedule of values, which are not tied to the schedule but rather measured quantities. With improved scheduling software packages on the market today, complete resource loading from personnel and specific equipment can be assigned to any activity within the schedule. Additionally, some software packages are also combining and developing daily reports from the scheduling software. Although in theory having all information regarding a project in a single schedule database location is appealing, it requires daily if not hourly input and maintenance by highly skilled and knowledgeable persons. Similar to rigid cost loading, the maintenance of resources within the schedule itself detracts from the time the scheduler could use to focus on realistic predictions of work to come and areas that require improvement (i.e., critical, subcritical, and slipping operations). Complete and full resource loading in a project schedule is not considered a typical requirement on most projects; however, it is typically used indirectly when preferential (or discretionary) logic is used. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Schedules 111 Most contracts do not allow the use of preferential logic (such as sequencing by logic ties and making dependent two unrelated construction activities) in a project schedule. However, there are situations where it is a reasonable approach in the scheduling of the work. For example, if a project has three shafts of a similar diameter, it is generally reasonable for a contractor to expect to purchase one concrete shaft form with the intent to use this form for all three shafts, assuming schedule constraints and work sequencing can support this assumption in the schedule. To show the common use of this form for all three locations, the form use for each of the independent shafts would be logically tied to one another within the schedule using preferential logic. As this form would be a specialty piece of equipment, with a presumed extended procurement duration, it would be a reasonable request by the contractor to allow such preferential logic as long as the common resource to be used is clearly defined and enough float exists to assure the owner that this logic will not adversely affect the critical path. Float Float is the amount of time that an individual task in a project can be delayed without causing a delay to a subsequent task or the total project completion date. “Who owns the float” has been a subject of considerable debate ever since the CPM gained popularity in construction contracting. The most common approach is that float is a shared commodity, to be used as an available resource for whoever needs it first. However, there are times when the party that creates the float should have exclusive use of that float: ■■ If the contractor creates float by bringing in additional resources such as people or equipment so that equipment can be taken to another job, then the contractor should get exclusive use of the float created. The contractor has no incentive to do the work faster if the owner can use the float, and the effect of removing float from a contractor’s schedule for the owner’s use may introduce unpredictable consequences to the contractor’s production plans or resource allocation. ■■ If the owner creates float by providing critical path, owner-furnished material before it is required by the schedule, or by deleting critical path work, then the owner should get use of the float created. Many more discussions on the creation, use, and ownership of float are beyond the scope of this book. Additionally, the ownership of float in a delay analysis can be very complicated when preparing time impact analyses in support of requests for time extensions. Furthermore, the contractor is often at odds with the owner on its right to finish early based on the contractor’s means and methods and on delays to its schedule that require compensation from the owner (see Chapter 11). These are important concepts, especially when the contract contains clauses that incorporate financial incentives for finishing early or liquidated damages provisions for late completion. A P P R O V A L OR ACCEPTANCE OF A CON T R A C T OR ’S SC HEDULE A contractor should be required to submit the original project schedule, updates, and revisions to show the owner, engineer, or construction manager that it understands the project requirements and how they are intended to be implemented. The engineer and/or construction manager will monitor these schedule-related submittals for adherence to the required interim and final completion dates, to make appropriate contract adjustments for changes, Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 112 Chapter 8 and to forecast construction efforts. Because the contractor is responsible for means and methods, the engineer need only accept for the record, not approve, these schedule submittals. By accepting a schedule submittal, the engineer acknowledges that the contractor has addressed the minimum requirements set forth in the technical specifications but does not approve the reasonableness of the durations used, which reflect the contractor’s resources, work sequences, and means and methods anticipated for use. S U B C O N TR A C TOR SCH ED U L I NG PROBL EMS On major underground construction projects, it is common to include various specialty elements that typically are not items a prime tunneling contractor can or should perform. As such, when these elements are input into a project schedule, the inexperience of the underground contractor with these specialty elements may result in underestimating the duration(s) required to complete these activities. These specialty elements can include anything from major mechanical and electrical components to architectural finishes, testing, and commissioning. An underground contractor depends on acquiring proficient subcontractors to perform this work. Although coordination with the specialty subcontractor(s) most likely occurred during the bidding process, the relatively short time allowed to submit a baseline schedule does not always allow for sufficient time to acquire crucial subcontractor input on schedule. More often than not, final subcontractor negotiations are completed after the project baseline schedule is developed and submitted to the owner. This may force the subcontract work to fit within the baseline schedule using unrealistic durations, which may pose multiple coordination and scheduling problems, typically in the latter half of the project. Wilson and Edgerton (2017) offer a more detailed discussion on schedule abuse during procurement and construction. S H O R T-TE R M AND PARTI AL SCH ED U L ES For day-to-day planning purposes, the CPM or linear schedules do not serve to clearly show the work plan and crew assignments. Typical practice is for the contractor to prepare a three- to four-week look-ahead schedule to show how and where crews and equipment will be used. These short-term schedules, usually done by hand or with spreadsheet software, can be prepared once a week, or sometimes every day. Jobsite meetings where these schedules are created are usually led by the general superintendent, and input is incorporated from superintendents and field engineers. Output is used not only by the work crews, but also by schedulers to monitor progress against the official CPM schedule, and by community relations staff so that third parties can be advised of upcoming events. These short-term look-ahead schedules can also include one previous week, to make documentation of as-built schedules easier. On certain projects that require tie-ins to operating systems, such as treatment plants or operating rail systems, it is normal to have a special day-by-day worksheet schedule for the tie-in period to communicate planned construction activities to owner or agency operations staff. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Schedules 113 F O R E N S I C S CH ED U L I NG Throughout the duration of an underground project, contract disputes that relate to the construction schedule are not uncommon. Forensic scheduling is the evaluation of project events using the CPM, linear scheduling, or some other method to resolve disputes. Forensic scheduling is a technical field that is related to, but not the same as, project planning and scheduling. Although the underlying theory and concepts of critical path and float are the same, the forensic scheduler is tasked with analyzing delay and disruption on an after-the-fact basis, which is a completely different objective than managing the project and using the schedule as a prediction tool. Methods that are used for planning, scheduling, and managing the project are generally not adequate for determining the excusability and compensability of delays. Commonly used methods for such evaluation include as-planned versus as-built analysis, window analysis, impacted as-planned analysis, collapsed as-built analysis, and a host of others. (For further details, see AACE International 2011.) M O N TE C A R L O SI M U L ATI ONS Several ways exist for an owner to establish a realistic contract time. To begin with, the owner should insist that the schedule be prepared by a person who has experience in the construction or construction management of similar projects. Risk management efforts, which usually focus on the costs associated with events that could impact the project, can be expanded to assess the time impacts of these events. If this is done, then a Monte Carlo analysis can be performed using the probability that certain risk elements could occur. (Risk analysis is discussed in Chapter 4.) A reasonable cost and schedule contingency can then be assigned to the project base cost, which the owner can use to decide whether to increase the allotted contract completion time. The likelihood of encountering events such as differing site conditions, additional adverse site conditions, and weather impacts, as well as the estimated time impact on the schedule, should be included in this analysis. C O N C LU S I O N S AND RECOM M END ATI ON S When the owner sets the time allotted for the completion of the project, this allotted time must reflect the reality of the project, its geographical location, community constraints, interfaces with follow-on and concurrent contracts, and potential construction techniques. If the time allotted is too little, it could affect the willingness of contractors to submit bids, and the owner could see additional costs in the bid price or claims for acceleration by the contractor. It is always prudent for the owner to build in a little extra time to avoid such problems. A well-thought-out schedule, using a realistic approach, greatly improves the likelihood that everyone is on the same page. ■■ Recommendation 8-1: Underground project schedules should be prepared with input from personnel who are experienced in underground construction methods to ensure that activity durations and project completion time frames are realistic. This recommendation applies to both contractor and owner staffs. ■■ Recommendation 8-2: Linear schedules can be used to graphically illustrate the planned production for underground construction projects and can be combined Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 8 114 with critical path method (CPM) schedules to illustrate dependencies, hold points, and interim milestones. ■■ Recommendation 8-3: Periodic progress payments to the contractor should not be solely based on a cost-loaded CPM schedule. Approximate costs can be generated within the schedule for forecasting cash flows, and monthly payment determinations can be based on the separately maintained schedule of values. ■■ Recommendation 8-4: During construction, the contractor should get exclusive and subsequent use of all float generated by its own efforts on projects when a liquidated damages clause is included within the contract. Conversely, the owner should get the use of all float generated by the early completion of owner activities, the early delivery of critical path owner-furnished material, and the deletion of critical path work. ■■ Recommendation 8-5: Any requirement dictating a time frame for submittals of project baseline schedules must include consideration of the complexity and size of the project, the number of activities within the baseline schedule, adequate subcontractor input, and enough overlap with a project initial or preliminary schedule to account for a minimum number of baseline submittal review cycles. ■■ Recommendation 8-6: For design-build (DB) contracts, typically the design phase is on the critical path in the early stage of the project, and design activities should be treated equally to any physical construction activity, including defined resource allocations and accurate measuring of progress. ■■ Recommendation 8-7: When liquidated damages are included in the contract and attached to interim milestones and substantial completion, it recommended that suitable incentives be considered for early completion of the same milestones. RE FE R E N C E S AACE International. 2011. Forensic Schedule Analysis. Recommended Practice 29R-03. Morgantown, WV: AACE International. Wilson, S., and Edgerton, W.W. 2017. Joint effort. Tunnels Tunnelling Mag. (June–July): 30–31. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 91 Pricing and Payment Provisions I N TR O D U C TION No two underground construction payment provisions are alike. Owner’s precedents, political and budgetary climates, risk-sharing philosophies, and even the personal preferences of the author can affect how contract payment provisions are drafted. Payment provisions are intended to provide the owner with a means to measure and pay the contractor for work performed and protect the owner from paying the contractor more than it has earned, both of which are fair objectives. However, the implementation of payment provisions is often less than equitable. This chapter describes the most common pricing method used in the United States and different ways of measuring the work accomplished in order to process periodic payment requests. It also discusses problematic payment issues, which intersect with issues related to incorporating changes into the contract (discussed in further detail in Chapter 11). Then, the question of cost and time (A + B) bidding is examined for applicability to the underground industry. The chapter concludes with recommendations for addressing common payment provision problems. P H I L O S O P H Y OF CONTRACT PRI CI NG P R OVISIONS Pricing provisions establish a systematic process for compensating the contractor during work and at the completion of work for satisfactory performance and assigned/assumed risk. The industry consensus is that payment provisions should focus on the goal of being equitable, meaning that the provisions themselves should be fair and that they should be implemented in a reasonable manner. In the case of pricing provisions, both the perception In the case of pricing provisions, both the perception of equity and the expected timeliness of progress payments will factor into the level of contingency carried in the contractor’s bid price. Image courtesy of Museum of the City of New York [X2010.11.13642]. Photographer unknown Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 115 Chapter 9 116 of equity and the expected timeliness of progress payments will factor into the level of contingency carried in the contractor’s bid price. To compensate the contractor at various stages of the work, the owner must establish a method for measuring the amount of work completed in a specific time interval and assign a dollar value to that work. Regardless of the pricing method used, most of the problems that occur relate to progress payments as work is underway, not final payments. F IR M FI X E D P R I CE CONTRACTS Firm fixed price contracts are by far the most common type of contracts in the United States. In a firm fixed price contract, the contractor guarantees to perform the work in accordance with the contract documents for a firm fixed price and schedule. The contract price may be a single lump sum, several lump sums, unit priced, or a combination of lump sums and unit prices for individual work items. The payment sheet on which the contract price is detailed out is commonly referred to as the bid schedule, price proposal, or bill of quantities. The owner pays the contractor for work done as the project progresses, then issues a final payment at the end of the project. Several methods are used in the industry to measure the work accomplished for progress payments under an original lump sum bid. The first approach is a post-bid negotiated cost breakdown, or schedule of values (SOV), which requires the contractor to submit a breakdown of the work elements. This breakdown includes the anticipated quantities and proposed unit prices for each work element. From this breakdown, the owner and contractor then negotiate an SOV for payment purposes. The positive aspects of this approach are as follows: ■■ An SOV is inexpensive to implement and relatively easy to monitor. ■■ It gives both parties to the contract the opportunity to negotiate the SOV, thereby promoting confidence that the progress payment is fair. ■■ It provides some background for negotiating the value of subsequent changes to the work (however, see the subsequent discussion contrasting contract price and contractor’s cost). A potential disadvantage is that some costs (e.g., mobilization, indirect and overhead costs, escalation, and financing) can be difficult to properly allocate within the SOV, which usually consists solely of discrete elements of work. This can make it hard to negotiate a fair payment schedule. Mobilization and escalation are discussed further in the “Problematic Payment Issues” section. Unless the SOV contains specific bid items for mobilization (and demobilization), the contractor has no other choice than to include such costs in other bid items. The same is true for indirect costs, overhead, and escalation. A typical provision might read: “The dollar value allocated to Lump Sum Accounts shall be representative of the Design-Builder’s actual costs for performing the work including overhead and profit, and shall be balanced to ensure that sufficient funds are allocated for each portion of the work and shall be subject to acceptance by the Owner.” These costs can be difficult to properly allocate in an equitable manner. This is of particular importance on underground projects because of the nature of the costs: (1) relatively high up-front mobilization costs because of the value of the equipment used, and Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Pricing and Payment Provisions 117 (2) time-related costs that are not easily changed in the event of a work stoppage that affects earnings on direct work elements. The second approach uses a cost/resource-loaded critical path method (CPM) schedule (see Chapter 8). CPM scheduling software with this capability is affordable and widely available. This method requires the contractor to submit an acceptable price- and resourceloaded CPM schedule that identifies the basic elements of the work, their prices, and the resources required to accomplish them. The progress of the work is monitored via periodic updates of the CPM schedule. The positive aspect of cost and resource loading the schedule is that if the work is relatively stable and predictable, and the CPM includes appropriate activities, there can be precise monitoring of progress and precise predictions of cash flow. The negative aspects are twofold. The first is the need for continuous manual input and maintenance on the part of the scheduler, whose time could be better spent on maintaining the schedule for its true purpose; this approach often results in the schedule being used primarily as a payment tool rather than a schedule tool. The second negative aspect arises because of confusion between two words central to the approach: cost and price. These simple words mean different things to the contractor and the owner. For the contractor, cost is how much monetary expenditure is required to perform the work. Price is what the contractor charges the owner for the performance of the work. To the owner, cost is equal to the contractor’s price. Although it seems simple, these two words are often used interchangeably, which proves confusing. To the owner, a cost/resource-loaded schedule is a contractor’s price and contractor’s resource-loaded schedule. The drawbacks associated with the use of cost-loaded CPM schedules are so significant that this method is not recommended. Appropriate situations for the use of resource loading are discussed in Chapter 8. The third common approach for measuring and evaluating work for progress payments is the unit price method. In this case, the bid documents include an itemized list of the project work elements, or bid items, sometimes referred to as a schedule of unit prices or bid schedule. Contractors establish their proposed unit price for each item on the bid schedule. When the unit prices are multiplied by the established quantities and totaled, the sum is the contractor’s total bid price. For some bid items, the designated unit may be expressed as a lump sum with a bid quantity of one (1 LS). If such bid items are utilized, the contractual measurement and payment provisions need to be specific as to what is and what is not to be included in each item. This approach is relatively simple to implement, use, monitor, and revise under changing working conditions, and as a result is very common in the highway industry but less so in the building industry. When the contract is awarded and work begins, most of the periodic measurement and payment process simply involves a quantitative evaluation of work items put in place by the contractor. However, even in unit priced contracts, there are work/cost items that do not readily lend themselves to quantitative evaluation, such as mobilization, site maintenance, overhead, financing, escalation, profit, risk, and casualty costs. The manner in which the owner and the contractor handle these indirect and general expenses is the root cause of many payment problems related to firm fixed price contracts in general and unit priced contracts specifically. The post-award lump sum breakdown and bid unit price schedule are both acceptable methods for establishing the value of completed work. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 9 118 PR O B L E M A TI C PAYM ENT I SSU ES As mentioned, most of the payment problems related to firm fixed price contracts come from work or cost items that do not readily lend themselves to quantitative evaluation. Below are some of the problems associated with payment for these items. Achieving Cash Neutrality At the beginning of the project, the construction contractor spends a substantial amount of money that is not adequately represented by work in place. These costs include major equipment purchases, insurance premium deposits, bonds, mobilization of personnel and equipment, early material procurements, subcontractor advance payments, and survey layout. These expenditures can generally be a greater percentage of the total cost on an underground project than on an aboveground project. If a payment provision is not made for mobilization, the expense is likely to be reflected in the bid prices. The owner normally can borrow money at better rates than the contractor, so most underground construction contracts contain payment items to reimburse the contractor for mobilization expenditures in addition to other specific advance payment provisions. Except for rare instances and in certain alternative procurement models, the contractor should not be put in a position to finance the project. In formulating payment provisions for mobilization, the objective is to achieve cash neutrality for the contractor as quickly as possible. Some provisions base mobilization payments on the contractor’s submittal of paid invoices for specific cost elements identified as mobilization items. This approach can be difficult to administer and can create a point of contention if the owner’s staff does not have a thorough understanding of construction costs. For large projects requiring substantial investments in new specialized equipment such as tunnel boring machines (TBMs), conveyor systems, and slurry separation plants, one viable option is to use a separate mobilization item for the major equipment. Separate mobilization items for insurance and bond costs can also help lower the overall contract cost by avoiding financing costs. Payment provisions that use the actual-cost approach must clearly state what costs—for example, base, taxes, refurbishments, customs, and freight— are to be included in the mobilization payments and how those costs will be documented and submitted for payment. An added benefit to the owner of such provisions is that the contractor is paid in advance for the capital costs of such equipment, potentially eliminating those specific ownership costs from any subsequent claims arising from project delays. Manufacturers’ payment provisions for such items are fairly consistent. During the preparation of the contract documents, it is recommended that owners research these terms for use in developing their contract payment provision to ensure alignment with the markets. A common approach to formulating mobilization provisions is simply to allow the contractor to establish the payment amount for the cost item up to a capped limit. The limit can be either a fixed amount, as established on the bid schedule, or a percentage of the total contract price. In establishing this limit, it is recommended that owners use the engineer’s estimate to determine the expected cost, and attempt to achieve cash neutrality for the contractor based on the planned schedule. Mobilization costs are typically paid over defined intervals (e.g., over the first six months). Documentation such as site layout, shop drawing submittals, invoices, and evidence of on-site delivery of equipment is provided to substantiate progress. On underground Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Pricing and Payment Provisions 119 projects, it is common for mobilization payments to be completed during the first 10% of the project schedule, although for design-build (DB) projects, where the design must be complete before construction mobilization occurs, there may be alternative provisions. Often, contract provisions will allow for the retention of a portion of the mobilization item to fund demobilization at the end of the project. However, this practice can defeat the purpose of providing cash neutrality, and there are other contract provisions, such as retention, to ensure that demobilization activities are complete. Unbalancing and Front Loading Bids In unit priced contracts, the price schedule does not explicitly list many of the incidental cost elements involved in the work, including such items as overhead and general expense costs; bond and insurance premiums; site establishment and mobilization costs, which may exceed those reimbursed by the mobilization bid item; risk allowances; and profit. On an underground project, these costs, sometimes called the spread, can be 40% or more of the total project price. The contractor decides which bid item(s) will be used to recover these costs. A bid is said to be balanced when the spread is either distributed equally across all bid items or distributed realistically based on when work is performed in the construction schedule. For example, if a bid item is completed by a subcontractor requiring less exposure to risk and less overhead on the part of the contractor, then less spread may be applied to that bid item. Another example is permanent material purchase costs, including freight, handling, and storage, that may be required and that may be made in accordance with the schedule and market conditions. The concept of a balanced bid also applies to lump sum bids that are subsequently broken down into a schedule of values for progress payment purposes. Unbalancing a bid is a process wherein a contractor distributes a disproportionate amount of the spread of overhead and general expense costs to bid items without one of the preceding justifications. Unbalancing is usually prohibited by explicit language in the contract, because it can result in contractors being paid more than has been merited by the progress of the work. The owner’s risks in such a case are the contractor defaulting or being terminated on the contract after being paid for portions of the work not completed and the contractor being unable to finance the completion of the work. Front loading a bid is a form of unbalancing wherein the contractor allocates a disproportionate amount of the spread to work that will be performed early in the construction schedule, thereby getting paid less for work that has yet to be performed later in the construction schedule. When owners review bids, they should be particularly cognizant of front loading and resist the temptation to overlook it to accept a low bid. The inclusion of a reasonable and responsible mobilization provision can eliminate the need for contractors to front load the bid to stay cash neutral. Nonetheless, if apparent front-loading violations are suspected, the owner should not hesitate to review the escrow bid documents (to the extent allowable under the contract) and discuss the matter with the low bidder prior to awarding the contract. The owner must then decide if the unbalancing introduces a level of risk that the owner is unwilling to accept. In some circumstances, a contractor might be tempted to unbalance a bid by spreading distributed costs to unit priced items that it believes will experience quantity overruns, thus resulting in project budget overruns for the owner and perceived windfall profits for the contractor. However, when the contractor’s quantity takeoff shows that bid item quantities Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 120 Chapter 9 may underrun, it must reduce the proportionate amount of the distributed costs allocated to that item to ensure the recapture of real costs, including unrecovered overhead and general expense costs that would not be recovered when the estimated bid quantity fails to materialize. Problems of this type can be largely mitigated by the inclusion and judicious application of a sensible “variations in quantities” clause in the contract. Notwithstanding the preceding discussion, it must be understood that the notion of a completely balanced bid is a bit of a myth. Some unbalancing is inherent in the bidding process to be responsive to all instructions for bidders, risks, and schedule considerations. With detailed bid forms to fill out, along with voluminous supporting documents, as well as subcontractors and material suppliers waiting until the last minute to submit pricing, contractors will make late adjustments in one or two open bid items regardless of the scope. This dynamic of the competitive bidding process ensures that no bid is truly balanced. Variation in Quantity A variation in quantity clause provides for renegotiation of the unit price of a pay item if the actual quantity varies substantially from the specified bid quantity. Most unit priced contracts contain this provision, and the percentage of variation that triggers the provision is typically 15%–25%. When correctly applied and understood, this provision protects both the owner and the contractor. It protects the contractor when there are unrecovered distributed costs and profit if the as-bid pay quantities fail to materialize, and it protects the owner from cost overruns when actual pay quantities exceed those estimated in the unit price schedule. Problems arise when the intent of the variation in quantity provision is either misunderstood or subverted. This provision is intended to address only those variations resulting from inherent estimating uncertainties in the documents at the time of bid. Without the contractor’s agreement, they should not be applied to directed changes (see “Pricing Methodology” in Chapter 11). Similarly, the variation in quantity provision has been abused by owners specifying unrealistic pay quantities and unreasonable trigger thresholds in situations where the owner is uncertain of the actual quantity. In some cases, the pay item in question has been completely excluded from the variation in quantity provision. Such a practice may place an unfair risk burden on the contractor in competitively bid, firm fixed price contracts—a risk the contractor cannot evaluate and may not even know exists, hence it may become cause for a dispute. The variation in quantity clause should never be used to shift risk to the contractor. Pricing for Unknown or Unspecified Quantities One of the most common problems encountered in writing payment provisions for underground construction is addressing work items for which the quantities are uncertain. Primary examples are grouting activities for ground improvement and/or groundwater control; ground support activities for highly variable ground conditions; the removal of boulders and other obstructions in soft ground tunnels; and the handling, treating, and disposal of groundwater, and hyperbaric interventions. It is rare to find an underground construction project that does not have any of these conditions. The cost and time consequences of these variable conditions are magnified when the work involved is on the critical path, and these conditions frequently recur. Whether the project is a single lump sum contract or a unit Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Pricing and Payment Provisions 121 priced contract, the problems are invariably exacerbated when the owner shifts the risk for encountering these conditions to the contractor, which generally results in large claims, disputes, and schedule delays. A common method of addressing ground-related uncertain quantities is by use of unit prices for various items of work. The best practice for establishing a unit price schedule is to match the bid items with the cost elements, which minimizes the potential payment disputes. For example, bearing piles might include one unit price for furnishing piles by the foot, a second for pile setup by the each, a third for driving piles by the foot, and a fourth for pile cutoff by the each. Another example is grouting for water cutoff, which might include one unit price for furnishing grout material by the bag or weight, a second for drilling by the foot, a third for each volumetric inflow test, a fourth for each grout hookup to the hole, and a fifth for pumping grout by the volumetric measure. Such unit price structures provide equitable payment for uncertainties caused by the ground, and allow pricing based on expected cost for each work element, separating the fixed and variable costs into different unit prices. The best practice for establishing a unit price schedule is to match the bid items with the cost elements, which minimizes the potential payment disputes. Another way to provide compensation for unknown quantities is by use of the changes clause, discussed in detail in Chapter 11. To establish a contract budget for such changes, some owners use provisional payment or allowance payment terms to include funding in the contract for expected but unpriced work items and avoid having to seek time-consuming approval for additional funding during the work. Requirements related to these provisions are discussed further in Chapter 11. What is important for this discussion is to note that provisional payment terms alert the contractor to the possibility of performing an unknown quantity of work and establish a budget allowance and terms of payment for that work. When properly implemented, this approach is successful (see the box “Unit Pricing for Provisional Work Items”). In the underground industry, it is extremely rare for contract provisions to make the ground conditions and behavior the contractor’s responsibility. (In fact, this is an exit ramp or go-no-go to bidding for most underground contractors. An exception would be for unsolicited public–private-partnership [P3] projects, where the developer is essentially assuming more [or even all] project risks and correspondingly is compelled to thoroughly price all risks and contingencies.) The owner assumes ownership, control, and responsibility for geotechnical uncertainties, except in the case of specific contract provisions that allocate some of these to the contractor. This does not necessarily imply that the owner should supervise and direct the work in the field, but the contract documents should provide such necessary elements as the following: ■■ A baseline quantity on which the contractor can rely in preparing the bid. Such quantities need to be realistic, founded in the known geotechnical conditions of the project and current construction practices. ■■ Provisions detailing how the contractor will be compensated in the event that the quantities exceed the baseline. Where the work is on the critical path, these provisions must address direct and time-related costs for the resulting schedule impact, and an equitable time extension. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 122 Chapter 9 Unit Pricing for Provisional Work Items An example of the successful implementation of provisional work items is the Lake Mead Intake No. 3 project, which was completed in 2015 by the Southern Nevada Water Authority (SNWA). Tunneling through fractured, faulted, sheared and jointed rock with relatively shallow cover under Lake Mead was expected to produce large amounts of water inflow requiring substantial pre-excavation grouting efforts. Moreover, use of a pressurized-face TBM may have required hyperbaric interventions for repair and maintenance. Although both pre-excavation grouting and hyperbaric interventions were anticipated, it was not possible to accurately predict the time and effort required. Accordingly, the design-builder was required to provide lump sums at time of bid for each of the following work items: pre-excavation grouting of TBM-excavated tunnel, pre-excavation grouting of access shaft and drill and blast excavation, and hyperbaric interventions. During construction, if the actual costs for pre-excavation grouting or hyperbaric interventions exceeded the design-builder’s lump sums, then SNWA had an excess pre-excavation grouting and hyperbaric intervention allowance to be used to compensate the design-builder for the actual additional costs, except for some disallowed cost items. No claim for differing site conditions related to pre-excavation grouting and hyperbaric interventions could be submitted or evaluated until all of the design-builder’s lump sum items and the excess pre-excavation grouting and hyperbaric intervention allowance was exhausted. After completion of the work, the unused allowance amount was split equally between SNWA and the design-builder. Over the course of the work, the design-builder’s lump sums for pre-excavation grouting and hyperbaric interventions were exceeded, and a portion of the excess pre-excavation grouting and hyperbaric allowance was expended. The unused portion of the allowance was split between SNWA and the design-builder without incident or dispute. Many owners include provisional sums or allowance items to provide an efficient means of payment for situations where the owner does not want the bidder to include unnecessary risk contingency in their bids, and to provide an expedited payment mechanism if such risks materialize. Time-Related Costs Compensation for direct costs has frequently been addressed using time and materials (also known as force account) provisions, which require that labor, equipment, subcontractor costs, and materials be documented contemporaneously with the work. Disputes inevitably arise over the related indirect costs, particularly when the work is on the critical path. Recent projects have successfully implemented provisions for incorporating these variable costs as provisional pay items in the bid documents, and avoiding the force account provisions, thereby preempting such cost disputes. In addition to providing the unit cost of performing the work, some owner agencies have solicited unit prices for each increment of delay. This might be the cost per hour or per day and includes standby time for other affected crews and equipment as well. In all cases, these unit costs must include all related direct and indirect costs, support crew costs wherever appropriate, and overhead and profit. Experience has shown that most time and materials work does not fully (or fairly) capture all allowable costs, delays, or work-out-of-sequence issues and impacts. It should be noted that documentation in support of time and materials costs is extremely burdensome for all parties, which frequently include suppliers and subcontractors. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Pricing and Payment Provisions 123 Payment for Stored Materials The cost of permanent and temporary construction materials can typically constitute 40% or more of the total project costs. Because these materials must be purchased, delivered, stored, and paid for prior to their use, there can be a substantial lag time between when the material supplier is paid by the contractor and when the contractor is eligible for payment for the completed work in place. In the underground industry, common items in this category include large-diameter carrier pipes and valves, precast concrete segmental linings, and support-of-excavation materials. As with mobilization, most owners recognize that asking the contractor to bear the financing cost will increase the project cost to the owner. So owners provide payment provisions for a percentage, typically 50% to 90%, of the invoiced value of the materials on delivery to the site or a designated yard or facility. Clearly defined provisions must be included in the contract documents to ensure payment for stored materials. From the contractor’s standpoint, the costs of storage, handling, insurance, and carrying costs (interest on contractor investment) can be substantial. The difference between the net payment received from the owner and the full value of the material paid by the contractor can be a significant cost that will be reflected in the bid price. In agreeing to provide payments for stored material, the owner must have in place processes for verifying compliance with specifications, quality control, inventory control, verification of payments to suppliers, security, and appropriate insurance coverages. Occasionally, market conditions for construction materials experience extreme volatility over the expected duration of the project. When this occurs, owners can benefit by providing special provisions for advance payment of raw materials (e.g., steel and cement) that may be necessary for manufactured products used during the work. However, because inventory controls on raw materials stored off-site are difficult to implement, such provisions are typically used only on projects with remote jobsites and are uncommon for underground construction. Escalation In some years, the market for petroleum products, steel, cement, and other construction materials has been unpredictable because of such factors as U.S. dependence on imported products; natural disasters; and international politics, tariffs, and conflicts. Material escalation costs, including power and fuel, are major categories of escalation that are often addressed in the contract payment provisions. Each is driven by different factors and should be considered independent of the other. To avoid paying for such costs in advance in the bid price, many owner agencies include contract provisions that address the risk of escalating costs, regardless of whether the contractor actually experiences such costs. Labor escalation in the United States has recently been more stable and predictable than the market for materials. The general stability of organized labor contracts (including project labor agreements [PLAs]) and the slow response of nonunion labor rates to market conditions means that labor escalation is not usually a concern for projects of less than three or four years in duration. Labor escalation payment provisions are not common, usually only coming into play during contract delay/change negotiations (see Chapter 11). When used, material escalation provisions typically provide for the contractor to receive additional compensation for goods purchased after a threshold increase in the market price of the goods or services with increases in price up to the threshold amount included in the Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 124 Chapter 9 base bid. A recognized published cost index is normally specified for administering escalation provisions, with the base index established at the submittal date of bids. Provisions for payment adjustments are also established, usually as a percentage of cost increase (or decrease). Several methods exist to accomplish this. One method uses actual published prices and quantities of materials put in place, whereas another requires demonstration of the actual cost paid for materials to apply a price index. For labor costs involving salaried and overhead personnel, labor escalation can be monitored by a similar index. Craft labor escalation provisions may be indexed to existing labor union agreements or PLAs, or to federal Davis–Bacon wage determinations. Incentives Although some owners consider incentive clauses as the flip side of liquidated damages, there are several conceptual differences. Liquidated damages are not a pricing or payment provision but relate to schedules (discussed in detail in Chapter 8). Incentive clauses commonly relate to safety, early contract completion, and special conditions such as scheduled traffic closures or plant shutdowns. Safety incentives are probably the most common in the industry today and are usually incorporated into programs where the owner provides a consolidated insurance program, also known as wrap-up insurance (see Chapter 13). The logic behind such incentive programs is that if the owner and contractor share the premium savings resulting from a safe construction operation, the contractor has the incentive to construct the project safely. However, some believe that most successful contractors are extremely safety conscious and will make their best efforts to operate safely regardless of incentives, and that incentive awards therefore constitute nothing more than a windfall for accomplishing what is expected. Nonetheless, reports from owners that have implemented them indicate that projects with safety incentives have records that justify the practice. Objections to specific aspects of some safety incentive programs include the coupling of the incentive with penalties for a major accident or death. Contractors believe that even the most safety-conscious contractor could experience a major incident, and incentives or penalties will have no bearing on that occurrence. Further, objectors state that no good purpose is served by adding penalties to an incident that is likely to already have significant personal and organizational ramifications. A schedule incentive can be offered where there is a monetary or other advantage to the owner for full or partial early project completion. Examples include bringing a facility into revenue service early and mitigating the costs of leases and easements; and early completion and turnover of a specific work area for commencement of follow-on work, thereby accelerating the owner’s program schedule. When a schedule incentive is used, the specified contract duration is usually aggressive, and the liquidated damages penalties are typically severe. To be effective, schedule incentives must be achievable, practical, and nonpunitive with the entire project team fully engaged. Retention Retention provisions are considered a necessary part of the construction management process. The traditional purpose is to provide the owner with sufficient funds to complete the work or repair defective work if the contractor fails to do so and to ensure payment for Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Pricing and Payment Provisions 125 labor and material to suppliers. Contractors generally accept such provisions without objection, but problems can arise when the provisions are excessive or abused. In the underground industry, retention provisions allow the owner to retain a certain percentage of earnings from each progress payment up to a maximum, or ceiling. A typical provision might withhold 5%–10% of progress payments up to 50% of the total contract value, then cease further withholding, if the work remains on schedule. The retained funds are released when the contractor’s responsibilities under the contract are completed. In many cases, the provisions allow for partial releases of the retained earnings as the project approaches completion, on the condition that the contractor’s performance is satisfactory. In many jurisdictions, statutory requirements now permit retained funds to be placed in an interest-bearing account, allow the substitution of securities in lieu of retention, or allow the furnishing of a bond (60 RCW 28.011). This approach provides the contractor with some return on earned funds and results in lower bids and a favorable relationship during contract performance. Retention provisions can be abused when the owner, for example, uses the retention as leverage when negotiating contract claims and changes. In such cases, the owner views retention as an asset in the negotiation, a condition not supported by the contract. This is particularly inappropriate when claims and change-order negotiations extend beyond the completion and acceptance of the work, a situation not uncommon for underground construction projects. Timeliness of Progress Payments Monthly progress payments are standard in the construction industry, and the underground segment is no different. A typical contract provision promises payment from the owner within a certain period, say 30 days, from receipt of an acceptable payment application, which excludes any unacceptable or incomplete work. The contractors, their bankers, and subcontractors all depend on timely payment to satisfy suppliers as well as lower-tier subcontractors and consultants. One of the first administrative items to be worked out at the start of a project is what constitutes an acceptable payment application. This can include not only invoice format, but also the content. Some owners use the processing of progress payments as leverage for obtaining documents or submittals required in other portions of the specifications, such as monthly schedule updates (see Chapter 8) and narratives, the submittal register, and disadvantaged business enterprise forms. In some instances, a payment amounting to millions of dollars may be withheld pending such a submittal. Recognizing that some contractors require an incentive to provide (or disincentive for not providing) such documents, some owners have established liquidated damage provisions, which are implemented if materials are not provided in a timely manner—for example, $500 per day of delay in submitting a schedule update. As a liquidated damage provision, this is not a withholding but an agreed-on amount based on an estimated monetary impact to the owner. A newer and more equitable trend is to provide separate pay items for the timely submittal of such documents. In this case, the benefit to the owner is that there is financial payment tied to these submittals. The benefit to the contractor is that a multimillion-dollar payment is not delayed as a result of administrative processes. Other administrative processes to be resolved include agreement on what constitutes completion for the purposes of monthly payment. For example, does concrete placement Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 126 Chapter 9 itself trigger payment for a structure, or do the 28-day strength results have to be submitted? Early agreement on such interpretations will make for fewer disagreements as to payment. A+ B B I D D I N G The concept of cost and time (A+B) bidding is quite common in the highway industry but is not used as much in the underground industry. Under this concept, the owner establishes a daily cost for the time (e.g., $10,000 per day) and uses a bid sheet that requires bidders to fill in the cost to do the work (A) and the length of time (duration) to do the work (B). The bid evaluation is based on the sum of A and the product of the established rate (e.g., $10,000) and the bidder’s duration (B). The low bidder is selected by a combination of cost and time, with the contract amount established by the A number and the contract duration by the B number. This concept could result in a contract award to a bidder that was not low on cost but had conceived a way to do the work in a shorter period than other bidders had. By this method, the owner agency agrees to pay more for a shorter duration, based on the value assigned to B on the bidding sheet. A project may be especially suited to A+B bidding if the following conditions are met: ■■ Traffic restrictions necessary to complete the work (e.g., lane closures and detours) result in significant costs to the traveling public that are not recognized in the evaluation of the bid prices. ■■ Construction work will significantly impact the local community or economy, thus justifying the additional cost of acceleration to minimize the time of such impact. ■■ The contractor can apply innovative construction methods to accelerate the work in ways that are not feasible or practical to specify using prescriptive methods or work sequences. ■■ Utility conflicts, design uncertainties, right-of-way conflicts, or other issues that are outside the contractor’s control have little likelihood of delay. Such events could delay completion and result in the owner agency’s paying a premium for early completion that is not achievable. Many underground projects do not meet these criteria. Most tunnel projects include a dedicated portal site and access to the highways that do not require lane closures or detours. Because much of the tunnel work is underground, the public impact is generally only at the portal or shaft sites. This typically means that significant public impact mitigation devices (e.g., noise walls) must be incorporated into the prescriptive design. Because most tunnel projects operate on a multiple shift basis, the opportunities for acceleration are limited. And, most importantly, the primary control of the duration of any underground project is typically the ground and how well it responds to the means and methods used to excavate. As a result, on most underground projects, the A+B bidding method might result in the owner paying for a promised benefit that is unlikely to be achieved. However, some portions of certain underground projects may be well suited to the A+B method—for example, projects that require closure of a street for a certain amount of time to sink a shaft and recover a TBM. In such cases, it might be worthwhile to incorporate time into one of the unit prices similar to the A+B concept. If the contractor finished earlier than the time proposed at bid, it would get the daily amount as a bonus, and if it finished later than the time proposed, it would pay liquidated damages in that daily amount. This method is seldom used on underground projects in the United States but is still a responsive Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Pricing and Payment Provisions 127 approach to specific site conditions and potential schedule impacts. The payment provisions described earlier in this chapter are applicable to A+B bidding. P A Y M E N T F OR D ESI GN COSTS: D ESI GN - B UILD P R OJ EC T S Design-build projects have the added cost component of a dedicated final design team. As these costs can be a substantial increase over the traditional design-bid-build contract, it is not appropriate to consider design services as an indirect cost to be spread to other work elements, and special design payment provisions need to be included in such contracts. Within the typical underground DB scenario are two distinct areas of design services: 1. Design services (DS) or design phase. In the DS phase, the design team completes the design drawings, specifications, studies, and reports through released-for-construction deliverable packages. 2. Design services during construction (DSDC) phase. As the name implies, this phase occurs during construction of the project. A staff of designers is retained to address changes caused by actual field conditions, monitor construction for compliance with design assumptions, and respond to nonconformance corrective actions. DSDC services may also include quality control or quality assurance services; however, to avoid potential conflicts of interest, DSDC should never include both. Because each of these two phases is unique, two separate payment provisions are recommended. The DS phase can easily be subject to a lump sum number within the bid schedule. However, as this phase can last a year or more at the front end of the project, it is recommended that the contractor be required to further break down this lump sum within the SOV to provide as-earned payment during the design period. The use of various design levels (e.g., 50%, 85%, 100%) for the numerous design packages has proven to be fair to all parties. DSDC is a time-related phase, often extending to final completion of the project. For this reason, provisions providing progress payments on a monthly basis are recommended. Similar to the DS phase, owners may find it simpler to include DSDC as a lump sum within the bid schedule. If so, it is important to recognize the time-related nature of this work when negotiating the SOV and that a lump sum approach must also clearly define the scope and duration. Owners may also consider such payments for design over time as a mechanism to have designers available during the construction phase. C O N C LU S I O N S AND RECOM M END ATI ON S Recognizing that the objectives of both contracting parties can be achieved by an agreement that includes equitable payment provisions, this chapter set forth appropriate methods for making interim progress payments and discussed various payment provisions that have proved troublesome on underground projects. Lastly, an appropriate use of A+B contracting in the underground industry was presented. ■■ Recommendation 9-1: Cost-loaded critical path method (CPM) schedules should not be used for payment purposes. ■■ Recommendation 9-2: Contracts should include a provision for mobilization payments based on the contractor’s anticipated up-front expenditures. Funds allocated to mobilization should not be withheld for demobilization. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 9 128 ■■ Recommendation 9-3: Variation in quantity clauses are recommended for all unit price contracts and should clearly specify that, without agreement of the contractor, these clauses may not be applied to extra or changed work. ■■ Recommendation 9-4: The use of provisional payment provisions is recommended for unknown and/or speculative quantities. ■■ Recommendation 9-5: The owner should pay the full invoiced costs, including storage and insurance, for all substantial items of suitably stored, manufactured materials and equipment on proof of manufacturing compliance, delivery, payment to the supplier, and storage security. ■■ Recommendation 9-6: All construction contracts of more than four years in total duration should consider escalation provisions for materials. ■■ Recommendation 9-7: Incentive provisions are recommended in instances where early completion benefits the owner and is realistically achievable, the owner’s resources can keep up with the faster schedule, the reward is sufficient to motivate performance, and the provisions include features that recognize and provide relief for delays beyond the contractor’s control. ■■ Recommendation 9-8: Retention provisions should allow for progressive release as the work is satisfactorily completed. Contractors should be allowed the options of having the retained funds deposited in an interest-bearing account, substituting securities to be held in an escrow account, or providing a bond. The release of retention should not be withheld unreasonably and should be administered in accordance with the original intent of the contract. ■■ Recommendation 9-9: For design-build (DB) projects, the bid schedule and/or the schedule of values should consider separate payment items to cover the costs of project design and design services during construction. RE FE R E N C E 60 RCW (Revised Code of Washington). Liens. Section 28.011: Retained percentage— public transportation projects—labor and material lien created—bond in lieu of retained funds—termination before completion—chapter deemed exclusive—release of ferry contract payments—projects of farmers home administration—general contractor/ construction manager procedure—definitions. Olympia: Statute Law Committee and Code Reviser. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 10 1 Contracts I N TR O D U C TION The maxims of good contracts are universally accepted: an unambiguous scope of work, a fair allocation of risks, logical procedural protocols, and clearly articulated roles and responsibilities. When these are respected and achieved, the industry as a whole benefits. But, of course, this book would not exist if it were easy to develop and implement contracts that achieved each of these goals. Part of the difficulty is the parties’ lack of appreciation for differences between underground and aboveground construction, which this book seeks to address. The other difficulty, discussed in Chapter 1, is that the relationship between the parties and their approach to the project are often deciding factors in whether a project proceeds and is completed successfully. Each person in the industry is individually responsible for the relationships developed and attitudes exhibited throughout the projects. Collectively, the industry is responsible for striving to achieve these maxims and encouraging others to hold to them as well. Operating under preconceived notions about what the terms and conditions should be or what we think we can turn them into during construction should be replaced by taking a critical look at what the terms and conditions are, and then making an informed decision as to whether to enter the contract relationship. Once a contract exists, both parties to that contract must respect its terms and conditions. When both parties believe they are operating under a fair contract and that the known risks are within their control, the likelihood of a successful and economically beneficial project is enhanced. When both parties believe they are operating under a fair contract and that the known risks are within their control, the likelihood of a successful and economically beneficial project is enhanced. Beginning with this philosophy, this chapter discusses the state of contracting practice in underground construction. The primary focus is on the agreement between the owner and the contractor. The chapter begins with some background on contracting law and underground construction contracting. Then procurement considerations (such as delivery and Image © Fulcher/Elioff Collections Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 129 130 Chapter 10 pricing methods) are discussed in general terms, with specific applications to underground construction. The last sections of this chapter focus on the procurement of professional services, the owner’s option to pre-purchase material and equipment, the preparation of contract documents with specific recommendations as to underground-specific provisions, and methods for determining construction contractor qualifications. CO N TR A C T LA W AND U ND ERGROU ND CON ST R UC T ION Contracts are the glue that holds formal relationships together in our capitalist, free market system. Cogently defined, a contract is “a promise or set of promises for the breach of which the law gives a remedy, or the performance of which the law recognizes as a duty” (American Law Institute 1981). The body of law related to contracts for large construction projects is fairly robust and helps one to understand the duties and obligations of the parties. Unlike contracts for manufactured products, contracts for constructed projects and services recognize and make allowances for the uniqueness of the project’s location and environment and the potential that outside influences will impact the performance and price of the work. Because the purpose of the law is to give teeth to the provisions of a contract, the law also recognizes the influence of these factors. One judge aptly likened construction projects to battlefields, stating that there was no other environment in which “men must coordinate the movement of other men and all materials amid such chaos and with such limited certainty of present facts and future circumstances” (Blake Construction Co. Inc., v. C.J. Coakley Co., Inc., 431 A2d 569 [D.C. Ct. App. 1981]). In the past century, the courts have also come to better understand how underground construction projects differ from large aboveground projects. Judges no longer blindly apply contract law and convention from aboveground standards, such as the Unified Commercial Code, as most now recognize that the exigencies of underground construction often demand more flexible, timely, and binding cooperation, communications, and collaboration than are normally required for aboveground construction. Although the linear nature of underground construction is a major point of difference from aboveground construction, it principally is the risk of unanticipated subsurface conditions that sets underground construction apart. This risk and the associated liability appear to be a simple matter, and it is a fairly well-established principle that the owner has the responsibility for the ground conditions. However, those in the industry know that it is not so simple. Massive amounts of time and effort are spent determining whether a differing site condition exists, deciding whether it was caused by different ground or some other factor, such as a contractor’s means and methods, evaluating whether it was material to the work, and establishing the costs of necessary changes. The owner’s ground, the designer’s characterization of the ground, and the contractor’s handling of it, are all intricately related. Failure to distinguish responsibilities in the contract can easily lead to long and costly disputes that enrich lawyers and claim consultants while hampering efficient delivery of the project and potentially reducing the quality of the completed work. F A C TO R S TH A T SH APE U ND ERGROU ND CONST R UC T ION C ONT R A C T ING The underground construction industry can generally be summed up in two words: frequently adversarial. This condition is owing to several factors: Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Contracts 131 ■■ Limited past relationships among owners, contractors, and designers ■■ Regulatory environment ■■ Difficulty defining ground conditions over a large area ■■ Difficulty of allocating risk ■■ Relatively higher costs that impact the project ■■ Failure of contracts to fully or adequately address the scope and schedule limits and the site conditions Most owner agencies perform only a few major underground projects over the course of many years. This does not give owners the opportunity to develop their own underground construction experience or to form resilient relationships with a core group of highly experienced underground construction contractors and design engineers, which is unfortunate because the interrelationship of these parties on underground work makes close relationships and collaboration important for a successful project (see Chapter 1). Instead, the projects are often seen by the three parties as isolated transactions involving temporary or throwaway relationships with little opportunity for repeat business. Many underground construction projects are performed as single parts of larger municipal programs or are otherwise funded at least in part by federal or state dollars. Accordingly, contracts for these projects must comply with applicable federal and state regulations. Not surprisingly, these regulations may sometimes seem overly restrictive or bureaucratic to those outside the system. Recognizing the goals behind the regulations (preventing corrupt business practices; promoting equitable access to contracts; and providing opportunities for disadvantaged, minority, and local businesses) can help participants be patient with the process. Failure to distinguish responsibilities in the contract can easily lead to long and costly disputes that enrich lawyers and claim consultants while hampering efficient delivery of the project and potentially reducing the quality of the completed work. Risk allocation typically becomes problematic when the consequence of a risk exceeds the contingency assigned to cover that risk. As discussed throughout this book and detailed in Chapter 4, the state of the practice in risk allocation is to assign risk to the party in the best position to control that risk. However, when the consequence exceeds the contingency, including the scheduled time, the burdened party will likely look to spread the consequence to others to the extent possible. A comprehensive evaluation of risks and risk ownership must be made well before the contract documents are completely finalized and the construction contract procured to equitably distribute the risk within the contract itself and allow the party suffering the consequence to control it. Contracts that do not comprehensively set forth the scope of the work and the anticipated subsurface conditions may result in the contractor misunderstanding the required scope. As a consequence, the bid price may be insufficient to perform the work. Well-written contract documents and better communication between the owner and the bidders before the price is established can help avoid this difficulty and others that may arise during the construction phase. The same can be said of issues related to the project schedule, interim milestones, incentives, and penalties. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 132 Chapter 10 PR O C U R E M E N T OPTI ONS: D EL I V ERY M ET HODS When an owner decides to embark on an underground construction project, many procurement considerations arise, including delivery and pricing methods. The key variables in making decisions are the objectives and constraints of the project and the resources, skills, and experience of the owner organization. It is not necessary for an owner to have been involved in previous underground construction to appreciate the range of delivery methods available and the impacts of each option. The delivery methods available to owners include (1) design-bid-build (DBB), (2) design-build (DB), (3) CM at risk, (4) alliancing, and (5) public–private partnerships (sometimes referred to as P3s). Design-Bid-Build Design-bid-build is a traditional approach that begins when the owner retains a professional design firm to study the project, evaluate the owner’s needs, investigate the site, and prepare an appropriate design integrating all available factors and conditions. The owner incorporates the design into a corresponding bid package and invites construction contractors to tender bids. The owner then selects the contractor that will construct the project. In public agencies, procurement regulations typically require award to the lowest responsive and responsible bidder. Contractor prequalifications may also be involved if it is in the owner’s interest (and ability) to limit bidders to only those with satisfactory experience, personnel, and financial resources to perform the work. Theoretically, a system that involves a willing buyer (the contractor) in a competitive (bid) environment will result in the most economic efficiency. In reality, the difficulty of completely describing underground projects often leads to misunderstandings and residual uncertainties that drive the actual cost of the project well beyond the estimated cost. Moreover, often these misunderstandings result in disputes that carry additional costs in the form of attorney and claim consultant fees. The frequent litigation on DBB projects has caused some in the industry to refer to the model as “design-bid-build-sue.” Modern contracting practices have largely corrected this situation with prudent remedy-granting clauses and procedures, including the use of geotechnical baseline reports, along with strict requirements for the parties to communicate and resolve potential disputes in a timely manner while concurrently managing the project schedule. Most misunderstandings and disputes on underground construction projects are the result of unanticipated subsurface conditions (see Chapter 3). Such misunderstandings were a major impetus for the U.S. National Committee on Tunneling Technology’s Better Contracting for Underground Construction (USNCTT 1974). For the most part, the recommendations made then have become state of the practice today. Today’s investigative and analytical techniques for exploring the ground, the construction equipment and methods for dealing with the ground, and the contractual mechanisms for resolving differing site condition disputes are better than ever. But an unacceptable amount of friction and inefficiency still exists with the DBB procurement model. Much of this relates to two factors: (1) differences with the owner’s design engineer who assumed a certain means and methods when the contractor had something else in mind; and (2) different interpretations of the contract documents as to what is allowable (or not allowable) and what should be anticipated in the base bid. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Contracts 133 Design-Build In the DB model, an owner retains a single entity to both design and construct the project. Although the DB model has actually been in practice longer than DBB model (in the sense of construction by a master builder), it fell out of favor in the United States around the middle of the 20th century because of fears of favoritism and other corrupt procurement practices and the desire for greater transparency in procurement for public projects. To counteract corruption and promote transparency, states began to adopt legislation that required competitive bidding. In the past 10 years, the DB method has reemerged. Many states have revised their legislation to allow the use of DB, and other states are experimenting with its use on a limited basis. It should be noted that an owner deliberately gives up some traditional control over the project (design and construction processes) under the DB contract delivery system. One obvious advantage of DB in underground construction is that differences with the owner’s design engineer, discussed earlier, are minimized. This is because the final designer is employed by the contractor, so the final design incorporates the contractor’s proposed means and methods, which include the anticipated interaction with the ground behavior. The beneficial collaboration between designer and contractor may be easier when the two are part of one organizational entity. (The DB contract, however, will not necessarily resolve differences between the contractor’s and the owner’s engineers.) Another advantage of DB is the ability to overlap the schedule of the design and construction activities. A compressed schedule can also carry disadvantages, however. If project pricing is based on incomplete design or geotechnical information, the resulting changes can make it necessary to modify the contract or cope with differing site conditions that were not evident at the time of bidding (see Chapter 7).* It is also important to recognize the formal role of the engineer-of-record (EOR) in the DB delivery method. In this method, it is the builder’s designer who has the responsibility for the final design and must stamp and seal the documents in performing the role of the EOR. This role should be carefully preserved and not obstructed with confusing and conflicting past practices (i.e., “we have always done it this way”) under a more traditional DBB model. It should be noted that an owner deliberately gives up some traditional control over the project (design and construction processes) under the DB contract delivery system. This can lead to difficult adjustments for existing agency staff and adjustments to well-established procedures. Construction Manager at Risk The Construction Manager at Risk (CMAR) is commonly used for vertical projects. Under this approach, the CMAR is engaged by the owner under a pre-construction contract to work with the designer and the owner to provide early contractor input into the design. The CMAR acts as the prime or general contractor and for vertical construction may only self-perform a limited portion of the work but the percentage of allowed work to be self-performed can vary greatly depending on the agency. CMAR is similar to CM/GC or GC/CM, and these terms are frequently used interchangeably. The four main benefits to CMAR are: * For further information on the applicability of the DB delivery method to underground construction, see Brierley et al. 2010. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 134 Chapter 10 1. Early Contractor Input in the Design; 2. Early Procurement of Long Lead Items; 3. Best Value Procurement of Sub-contractors and Suppliers; and 4. Shorter Overall Schedule. In CMAR, typically the prime contractor is asked to provide a target price with a guaranteed maximum and then solicit subcontractors for specific packages as the design progresses, adjusting the price as the final sub-contract prices are determined. The guaranteed maximum number usually has a contingency, which is typically reduced to a smaller amount at final design completion, because the risks are better known, however seeking a target price with a guaranteed maximum when the ground conditions are not yet fully identified usually results in a large contingency. The final construction contract may be structured as a lump sum, cost plus a fee, cost plus a fixed fee, or other form. Involving the contractor during the design phase provides for the opportunity to obtain early contractor input. If the teams work collaboratively together they can incorporate contractor-specific means and methods, address risk mitigation and allocation, and evaluate design and construction alternatives, as the project moves closer to final design. The CMAR can provide pricing for various alternatives so that effective decisions on scope and cost can be made. On underground projects, the primary risk to both cost and schedule is the uncertainty of the ground, and the contracting method itself has little effect on this risk. The benefits of this delivery method for underground construction can be maximized if the CMAR contract allows for a greater percentage of the construction value to be self-performed by the CMAR. This will ensure a higher chance that the prime contractor will be an underground contractor and thus provide more input in the design related to the primary risk. Underground projects where there are multiple trades and subcontractors to be coordinated and a limited working space, such as transit stations, may benefit more from the CMAR delivery method, but this approach should be evaluated on a project-specific basis. CMAR is becoming more common in the US for many types of project and vary in how they are applied. The known examples of the CMAR tunnel projects are the Portland combined sewer overflow project (Gribbon et al. 2003, 2007) discussed later in this chapter, the City of Atlanta water supply program (Bedell et al. 2018), the City of Austin Water Treatment Plant No. 4, and SNWA’s Low Lake Level Pumping Station. Alliancing Various forms of this delivery method exist, but pure alliancing is where the owner, designer, general contractor, and prime subcontractors all come together and have a stake in the overall performance of the project. Specific responsibilities are assigned to each stakeholder, and based on the performance of the whole project compared to the objective outlined, rewards or penalties for each are determined. Sometimes called relationship contracting, alliancing is fundamentally different than DBB and DB, which are based on the principle that all the costs associated with performing a contract are assigned to one of the two parties. Alliancing is intended to create a nonadversarial relationship in which all parties’ economic interests are aligned. In this case, all parties would include the owner, contractor, design, insurance, and bonding companies, as well as major subcontractors. All parties are contractually focused on an optimal project outcome. This sharing of rewards and risks (costs) Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Contracts 135 Alliancing: Northside Storage Tunnel The Northside Storage Tunnel was designed and constructed in Sydney Harbor (Australia) using an alliancing approach. The project and delivery method were generally deemed a success by owner Sydney Water because the project achieved the objective of completion in time to support the 2000 Olympics and met other community relations and environmental management criteria. A post-construction public audit found several positive outcomes and suggested that the project would have fared worse under a typical zero-sum contract approach but also indicated that it was not able to determine whether the project delivered “value for money,” which is critical in publicly procured projects (Audit Office of New South Wales 2003). distinguishes alliancing from the voluntary partnering concept (see Chapter 1) that has been applied to DBB and DB projects. The theoretical benefits of alliancing are obvious. However, given the historical relationships between owners and underground contractors in the United States, it would take an intrepid owner and an uncommon level of trust to successfully procure a major underground construction project in the United States via alliancing, although it has been done overseas (see the box “Alliancing: Northside Storage Tunnel”). Public–Private Partnership The term public–private partnership (P3) is generally used for a project that includes partial financing of the overall project cost by a private entity. Currently, this contracting model is not very common in underground projects in North America but has been the preferred method of delivering what would have been public projects for many years in other parts of the world—most notably Canada, Australia, and Europe. Because of the lack of traditional public funds and the vast infrastructure needs of a growing population and economy, this is a way to capture private investment for public project needs. In a P3, instead of the public entity having to pass a bond issue or raise taxes to fund public projects, it solicits proposals for the financing, design, construction, operation, and maintenance of the public work in return for revenue in the form of lease payments or some other predetermined income flow for a specific period (oftentimes 25 years or more). Many water districts, sewer/wastewater facilities, and so forth, are using this method to deliver infrastructure needs to the public. Of the many variations of P3, some include operations and maintenance of the project in addition to the construction of the project. Normally, the entity bidding a P3 contract to an owner is a developer or financier. This entity will have to develop a complete organization to deliver the project, which could include designers, contractors, operators, and maintenance contractors. P3s are not discussed in detail in this book. This is for several reasons: (1) many different types of contract provisions can be assembled into a P3, with widely varying risk allocation tools, many of which are discussed under the other delivery methods; (2) there is insufficient experience in the North American underground industry to make generalizations about recommended practices specific to P3s; and (3) the performance of P3s has been spotty for reasons not related to the contract practices discussed in this book. It has been challenging to use this delivery method in the United States as the federal, state, and local governments have various procurement statutes that might restrict or prohibit a P3 in certain circumstances or geographies. Circumventing this challenge has required changes Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 10 136 in laws, which is a difficult process and can vary dramatically with each of these political subdivisions. However, this trend is gaining momentum, and it may be a big part of the future of underground construction. When considering a P3 procurement for an underground project, the technical and contractual risks related to underground construction must be evaluated and addressed. As an example, the risk of encountering differing site conditions is not any different for a P3 procurement than for a DBB procurement. Therefore, the P3 contract must also address differing site conditions in a fair, understandable, and equitable manner. S E L E C TI O N O F D EL I V ERY M ETH OD Many agencies seem poised to experiment with variations on both DB and DBB contract delivery methods. An example of a variation of DB is progressive DB, where the DB contractor would be engaged at a conceptual design phase instead of a more advanced design phase (see DBIA 2017). Some agencies performing underground construction have accepted the DB concept; several projects have been completed with this method, and others are in progress. However, opinions vary widely on the success, timeliness, and cost-effectiveness of the outcomes. The federal government has fully embraced DB as a viable alternative to DBB and is actively investigating other models. Yet, procurement regulations in some states limit public owners to the DBB model. In those states where DB is prohibited, the legislature can approve exceptions on a case-by-case basis, but the approval process can be cumbersome, and the legislature may place additional constraints that reduce the benefits of DB. As stated previously, in selecting the delivery method, owners should consider their own organizations, procedures, and practices, as well as the specific requirements of the project. Because the models cannot be fully evaluated in abstract terms, one relatively simple approach is to examine them in the context of specific project requirements, as demonstrated in Table 10-1. The evaluation of delivery methods requires owners to make projections and predictions about future events, which if they unfold differently than anticipated, can subject the owner to criticism for selecting one method over another. Accordingly, the evaluation and decision process should be rigorous and well documented. PR O C U R E M E N T OPTI ONS: PRI CI NG M ETHODS Several different methods can be used to select contractors and determine the contract value (pricing methods). The three most common methods for selecting contractors are (1) low price, (2) best value, and (3) two-phase selection. For these methods, the contract value is established as part of the selection process. Other selection methods determine the contract value through (4) cost-reimbursable methods, or (5) a negotiation to establish a fixed price in advance of the work. Low Price In the underground industry, most publicly procured DBB projects are selected based on the lowest price resulting from bidders utilizing a set of bidding documents provided by the owner. In response to a public advertisement, bids are opened in public and subsequently reviewed to ensure that requisite bonds are included; all addenda have been acknowledged; Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Contracts 137 TABLE 10-1 Design-build and design-bid-build evaluation Design-Build Makes Sense If Design-Bid-Build Makes Sense If Alternative means and methods exist, which • Maximize innovation; and • Improve constructability. Schedule is important, and design is not yet complete. Adjacent contracts have minimal interfaces. Design criteria are well established (changes in design-build are costly). Design risk must be shifted to the contractor. Many third-party commitments exist, such as • Restrictions on means and methods, • Utilities with unidentified scope, • Understandings with community groups/leaders, • Multiple public agencies or municipal jurisdictions, or • Environmental constraints. Work must be phased because of • Real estate acquisition, • Funding constraints, • Undetermined utility relocation requirements, and • Regulatory approvals. Owner has institutional resistance because of • Procurement policies and/or regulations, and/or • Opposition from its engineering and administrative staff. Owner wants (or does not want) a particular designer. no technical or commercial exceptions are taken; and the bid appears complete, or responsive, to the solicitation document. The lowest-dollar-value bid is then deemed the apparent lowest responsive bidder and, if a prequalification process has not been done before the contract was advertised, the owner then begins evaluation of the apparent low bidder’s qualifications (if any) and other mandatory documents submitted with the bid. The process may also include a review of escrow bid documents (discussed in Chapter 12). If the apparent low bidder fails to satisfy the qualification and supporting documents criteria, it is deemed not responsible, and the owner moves on to the second low bidder and repeats the process. In this manner, the lowest responsive and responsible bidder is determined and subsequently awarded the contract for the price bid. Best Value The best value approach considers other criteria in addition to price in the selection of a contractor. Although this method makes sense for certain DB projects, it is not typically used on DBB projects where the design is complete before bids are tendered. Because DB projects afford great latitude to the contractor in addressing facility operation, life-cycle costs, and impact to adjacent property owners, and because the selection method is designed to take these factors into account, using contract price alone may not be the best selection criterion. For projects funded with public money, the principles of fairness, objectivity, trust, and transparency demand that the detailed selection criteria be disclosed to the proposers in advance. The best value process is generally implemented with weighted selection criteria wherein the various factors to be evaluated are assigned a predetermined weight. The owner is well advised to keep the evaluation process as simple and as objective as possible, although sometimes that is difficult to do. Two-Phase Selection Federally procured DB projects must comply with the Federal Acquisition Regulations, which mandate a two-phase process (41 USC 3309). The first phase is the solicitation and evaluation of technical proposals. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 138 Chapter 10 The owner or its consultant develops the solicitation, which details the project scope, budget, and schedule requirements; the criteria that will be used for evaluating the technical proposals; and the number of offerers expected to be shortlisted. Offerers respond with technical proposals that describe their qualifications and technical approaches to the work. The owner evaluates the technical proposals and accepts those proposals that are deemed responsive to the solicitation. It should be noted that problems arise when an owner applies any degree of subjectivity to this selection process, because both the public and the bidders may object to subjective criteria. In phase two, the teams whose technical proposals have been accepted are invited to prepare and submit a price proposal, and the offerer of the lowest price is generally awarded the contract. Cost Reimbursable Cost-reimbursable construction contracts have long been the procurement norm for private industry and other heavy civil construction projects in situations where significant scope and risks could not be fully identified in advance. These projects include many diversion tunnels, penstocks, tailraces, underground powerhouses for electrical generation projects, and intake and cooling water tunnels for steam-powered electrical generation. Public construction procurement laws generally prohibit cost-reimbursable contracts or make them impractical. However, the City of Portland, Oregon, adopted a cost-reimbursable fixed fee contract to construct several large, technically complex underground projects. The so-called Portland approach used a two-step selection process. First was the submittal and review of qualifications, including proposed personnel, approaches to execution, safety, quality control, and subcontracting. The second was the submittal of a proposed fixed fee for management, supervision, home office overhead, and profit. After a qualifications-based selection process, the successful contractor was reimbursed for all labor, materials, equipment, and subcontract costs, and the fixed fee established in step two was distributed over the scheduled life of the project. Using the fixed fee approach, the contractor had a strong financial incentive to complete the project on time or ahead of time. Both owner and contractor stood to benefit from higher-than-expected productivity, and both stood to be burdened by lower-than-expected productivity. Checks and balances in the form of a strong construction management team provided owner approval of incurred costs during construction and thus allowed some degree of control over total project costs. Whereas project costs saved through design revisions as a result of the contractor’s input accrued solely to the owner, time savings from these initiatives indirectly benefited the contractor. Perhaps the most encouraging aspect of the Portland approach was the design assistance services provided by the contractor. The contractor selection was timed to occur well before the design was complete. Therefore, the contractor was available to assist the designer and shape the contract documents before they were finalized. Once established, the cooperation between the designer and contractor extended through the construction period (Gribbon et al. 2003, 2007). The contractor’s input has been shown on a variety of contracts delivered via different delivery methods to contribute to a more constructible design, lower overall costs, and speedier completion. Thus, it is recommended for consideration by other agencies. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Contracts 139 The contractor’s input has been shown on a variety of contracts delivered via different delivery methods to contribute to a more constructible design, lower overall costs, and speedier completion. Thus, it is recommended for consideration by other agencies. Negotiated Procurement Negotiated procurement is commonly accepted in private construction but is less available to owners of publicly procured underground construction projects. As contrasted to public advertisement, in negotiated procurement, the owner solicits proposals from only those contractors it chooses to work with, on an invitation basis. (The solicitation is called an invitation to bid as opposed to an advertisement for bids.) The scope of services provided by the contractor can include any or all the project services: planning, permitting, design, construction, and operation. With proposals in hand, the owner is free to negotiate with all contractors simultaneously or to select its favorite and attempt to negotiate an agreement with that contractor first, before resorting to second choices. To negotiate successfully, the owner needs an estimating staff or a consultant with a detailed knowledge of the construction scope, schedule, and means and methods for satisfactorily completing the work. Although negotiated procurement is not typically used by public owners, when employed, it provides a powerful mechanism for balancing owner requirements with contract price—allowing risks, responsibilities, and rewards to be discussed and agreed on before execution of the contract. The process must be done in a methodical and transparent manner, wherein all viable (prequalified) contractors are afforded the opportunity to submit best and final offers on the revised and final scopes of work. Negotiated procurement can also be used with a low-bid contract solicitation if a trigger mechanism is included that calls for negotiation after receipt of bids when the trigger is reached. For example, if the lowest bid exceeds 110% of the engineer’s estimate, then the contract price might be negotiated with the low responsive bidder, but this action will depend on the procurement agency’s rules and standard practices. P R O C U R E M E NT OF PROF ESSI ONAL SERVIC ES Although most public agencies must use low-bid procedures to procure their construction contractor, they are generally given wide discretion in selecting design professionals and other professional services. However, projects using federal funds must comply with the Brooks Act (Public Law 92-582), which requires selection based on qualifications and subsequent negotiations with the most qualified firm. Many states have their own mini-Brooks Acts that apply to state-funded projects. Transparency in the selection process typically requires that the agency advertise its selection criteria and adhere to a good faith evaluation of the various firms bidding on the work. Usually, the selection process (which is subject to administrative or judicial review) involves several steps: issuing requests for qualifications, shortlisting, and issuing requests for proposals. Such a process allows the owner to carefully devise the selection criteria to retain the strongest team, based on attributes such as knowledge, skill, experience of key personnel and the firm on similar successful projects, flexibility, and timeliness. Unfortunately, all too often owners fail to take advantage of the opportunity to devise valuable selection criteria and instead make their selection largely based on price. Even in situations where an owner has prequalified multiple competent firms, it is inadvisable to Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 140 Chapter 10 emphasize price over other factors. Overemphasizing price gives professional service firms an incentive to make optimistic assumptions about the technical aspects of executing a project and therefore underestimate the project scope. If the optimistic assumptions prove incorrect, both the owner and consultant face cost and schedule overruns. A designer selected based on cost is also (1) less likely to advance multiple alternatives, because doing so requires time and costs money not already included in the budget; (2) more likely to prepare inadequate construction documents, which leads to changes and delays during the construction phase; and (3) more likely to pursue change orders to cover work not strictly identified in the agreed scope. O W N E R ’ S O P TI ON TO PRE-PU RCH ASE In any procurement model, an owner may reserve the right to pre-purchase certain equipment, property, and other items required to execute the project. Pre-purchasing could include the owner securing vacant property for the contractor’s use as a staging or laydown area or the owner arranging for the local power company to provide utilities needed to execute the project. Both examples represent very minor incursions into what is typically considered the contractor’s means and methods. Both are also considered prudent actions on the owner’s part to secure resources and save time, typically on the project’s critical path. On some projects, because of long lead times for tunnel boring machine (TBM) supply, in an attempt to advance the schedule, owners have gone much further and contracted separately for supply of TBMs, precast concrete segmental liners, and even specialized highvoltage electrical equipment. The risk is that the owner has assumed some contract risk with respect to the interface between these supply contracts and the main construction contract as a result of the close relationship between the contractor’s means and methods and the TBM and segmental lining system. It is most common to have segment details and TBM details integrated within the design of the TBM. Doing so ensures that the machine is compatible with the segments (e.g., thrust jack heads match segment wall thickness). Pre-purchasing the TBM will either require owner-designed segments (so that the two systems are compatible) or will carry a new risk in the event that the contractor, once aboard, acquires segments that are not compatible with the TBM. If the TBM or segments do not perform as expected and represented to the contractor, the owner can expect contract disputes. In fact, segment erection claims may pit the owner’s TBM manufacturer against the owner’s segment manufacturer, with the owner and its designer stuck in the middle. In addition to these risks, pre-purchasing TBMs will likely cost more (assuming the same TBM and segments) than requiring the contractor to provide a TBM, particularly if fully reconditioned used machines are acceptable. This is because there would be limited incentive for the TBM manufacturers to compete, limited ability for the owner to obtain a contractor’s advantage in skill and experience with a machine (new of same brand or from existing fleet), and limited ability to provide TBM/segmental lining compatibility. Also, when the contractor purchases the TBM, it can adjust the maintenance and operations scope provided by the manufacturer to suit its own maintenance staff and ability, which varies significantly from contractor to contractor. The pre-purchase of TBMs has been done before with mixed results. In North America, the Port Huron tunnels (rail tunnels under St. Clair River [McDonald 1995]) and several subway projects in Toronto, Ontario, Canada were contracted in this fashion, as were the Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Contracts 141 Río Subterráneo and light rail transit tunnels in Argentina and Singapore, respectively. Detailed analysis of the success of this method is beyond the scope of this chapter but is available in other published literature. Consideration should be given to the project risks, in-house expertise, and contractor preferences, although there is not a single answer for whether or what owners should pre-purchase. A careful review of the construction schedule and the preliminary work necessary before the TBM is needed may reveal that there is no advantage to pre-purchase any equipment or permanent materials. If an owner decides to pre-purchase a TBM and design its own segments, it is advised to seek the input of contractors likely to be bidding on the project. C O N TR A C T DOCU M ENTS The contract documents for a publicly procured construction project typically consist of many sections and/or documents: ■■ Invitation or advertisement ■■ Information for, or instructions to bidders ■■ Agreement ■■ Terms and conditions of the contract (general and special provisions) ■■ Technical specifications ■■ Drawings and computer-aided design standards ■■ Geotechnical reports ■■ Design criteria and/or standard details (for DB) ■■ Environmental reports ■■ Pre-construction building and utility condition reports If the solicitation includes a technical proposal, selected portions of the proposal may also be considered for inclusion as contract documents. However, in deciding whether to incorporate the proposal into the contract, owners should consider (1) including portions that were key factors in the selection process, to obtain the benefits of the technical proposal; and (2) excluding elements of the proposal that have not been verified with the technical requirements and should be further developed during the final design process. It is frequently helpful, and recommended, for owners to provide information with the contract documents that explicitly is not part of the contract and labeled “For Information Only.” An example is geotechnical interpretive reports prepared for use by the final designer. This information is usually prepared by others for other purposes, but may be useful to the bidders. The information may generally be relied on to the extent indicated, but contracting parties should recognize that this for-information-only material is not part of the contract documents. The terms and conditions contain the fine print of the contract. Unfortunately, many participants pay little attention to them unless a dispute arises and competing interpretations of a provision are debated. Often, the resolution of a provision’s meaning occurs too late for any of the parties to change their behavior and thus change how the project moves forward. Instead, the resolution determines who pays and how much. One method of mitigating disagreements arising from potential conflicts between contract documents is inclusion of an order of precedence clause. Below is a sample list of DBB contract documents with order of precedence from highest (1) to lowest (14): Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 142 Chapter 10 1. Contract modifications (change orders) in inverse chronological order 2. Special provisions 3. General provisions 4. Agency design standards 5. General requirements (Division 1) 6. Technical specifications (Divisions 2 through 34) 7. Contract drawings (plans specific to the work) 8. Standard drawings and design criteria (owner specific) 9. Owner-controlled consolidated insurance program (OCIP) manual 10. Geotechnical baseline report 11. Geotechnical data report (and supplemental investigations) 12. Construction safety and security manual (if an OCIP is in effect) 13. Utility standards 14. Industry standards (specifically incorporated into a contract specification) It is important for the design team to know the order of precedence as they create the draft design documents, and they also need to have access to other portions of the contract for which they are not responsible, to verify that such portions do not impact or conflict with the design intent. These terms and conditions of public contracts are drafted by the owner and its procurement attorneys. In most cases, the contractor has little or no opportunity to negotiate the terms and conditions. This begs the question: What incentive does the owner have not to draft terms and conditions that allocate all risk to the contractor? First, public procurement laws generally require public owners to draft fair and reasonable contracts. Second, more qualified and sophisticated contractors either will decline to bid on one-sided contracts or will add contingencies that increase the contract bid price. As a result, substantially inequitable contract terms may contribute to a no-bid decision by contractors. One way to mitigate this risk is for the owner to establish an industry outreach program prior to advertising the project. Many owners use standard (e.g., aboveground) construction contract terms and conditions for underground projects. However, these must be modified for use on underground construction projects. Typically, the following adjustments must be evaluated: ■■ Changes clause. This clause should be reviewed, particularly the method of paying for owned equipment used on force account (time and materials). Most specialized tunnel equipment is not included in frequently referenced rental rate manuals (see Chapter 11). ■■ Dispute resolution board (DRB). Most if not all underground construction projects make use of a three-party DRB, and underground contractors will typically consider the presence of a DRB in their evaluation of whether to bid or not (see Chapter 12). ■■ Disputes clause. If the contract does include a DRB, the dispute resolution process, as described by the DRB specification, including the identification of how and when a dispute can be heard by the board, must not conflict with the process as described in the general and/or special provisions of the contract. Usually, this requires some editing to ensure consistency in the contract documents. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Contracts 143 ■■ Mobilization. Standard percentages for up-front payments to the contractor for mobilization are usually not sufficient to account for the expenditure of funds on the specialized equipment required for underground projects, especially those requiring purchase of new TBMs. To avoid having financing costs included in the bid price, it is common to make specific provisions for equipment mobilization in addition to a general mobilization payment (see Chapter 9). ■■ Schedule provisions. Underground construction is like building construction in that activity durations and logic define the construction schedule. However, the activities that control progress for tunnel construction projects are generally linear in nature. The critical path method (CPM) scheduling model alone is not a very effective method for monitoring progress and forecasting project completion for linear-type construction projects. A linear schedule can monitor production but lacks the ability to show relationships among activities. Combining the two methods produces a practical scheduling tool for tunnel and other linear-type projects. In addition, many contractors use linear schedules, not CPM schedules, to plan their work, and job-level communication is enhanced when both the owner and the contractor are working from the same model (see Chapter 8). ■■ Partnering. The contractual option for the establishment of partnering agreements and goals has been adopted by owners on many large underground projects (see Chapters 1 and 12). The contract documents must incorporate provisions for selection, attendance, frequency, and payment for participants in mandatory partnering sessions. Many organizations provide documents that set forth examples of fair and reasonable terms and conditions, including the Engineers Joint Contract Documents Committee (EJCDC 2019), the American Institute of Architects (AIA 2019), and ConsensusDocs (2019). Beyond referring to these examples, it is not practical to make specific recommendations about contract terms and conditions. Standard contract forms that are used internationally, such as those provided by FIDIC (International Federation of Consulting Engineers) and the NEC (which stands for New Engineering Contract) forms, are not widely used in the United States. Public owners’ procurement departments usually develop their own terms and conditions based on the owner agency’s experience over time. Contractors that work almost exclusively with the international contract forms should take specific note that the U.S. terms and conditions may significantly differ from those forms. Owners should compare their current provisions to the sample documents to determine whether their documents are balanced and not overly restrictive for the proposed project. Advice from engineers and attorneys is recommended in preparing a fair and reasonable set of terms and conditions that will solicit competitive proposals from the most qualified and experienced construction contractors. C O N S TR U C TI ON CONTRACTOR QU AL I F IC A T IONS The probability of a successful underground construction project increases when the construction contractor is qualified, experienced, and equipped for the task. Three common methods used to accomplish this are (1) post-qualification, (2) prequalification, and (3) shortlisting. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 144 Chapter 10 1. The most commonly debated question related to qualification is whether bidders should be prequalified before bid advertisement. Because some owners consider bonding as a type of prequalification, they do not include a prequalification step and rely on the evaluation of information provided with the bid documents (post-qualification) to determine responsibility. This approach has the following potential problems: –– The first is that the bonding company underwriting a contractor typically bases its evaluation on financial capability, and may not verify that the contractor has the specific technical skills required for the project or the equipment, labor, and supervisory staff. Each underground project is unique; construction skills are not interchangeable. Additionally, a well-documented safety record and established safety program and culture are essential. –– The second potential problem is that the surety business is subject to market force fluctuations that might lead the bonding company to refuse a qualified contractor purely for market reasons (see Chapter 13). –– The third problem is that, in the absence of prequalification, if a subsequent finding of responsibility determines that the contractor is not qualified, the award is likely to be delayed and the completion date affected. 2. In contrast, a robust prequalification process enables owners to review and verify bidder qualifications prior to soliciting bids. A prequalification process attracts high-performing firms that put value on the preselection process and spend the time to prepare a detailed well-reasoned bid. –– To avoid restricting competition unnecessarily, it is recommended that prequalification include as many potential contractors as meet the minimum requirements. The typical prequalification criterion is the level of experience with similar construction techniques (e.g., a certain number of linear feet of pressurized face tunneling; a certain number of pressurized face tunneling projects; or a project manager, safety manager, superintendent, and project engineer, each with a certain number of years of experience with such tunneling [Edgerton 2000]). For DB projects, one key consideration is whether the design entity and the contractor have successfully worked together before and how key personnel and recent past experience will be brought to the project. Uncertainties often arise as to whether the people or the firm are being prequalified and how (or if ) joint venture participants’ experience should be counted if that specific participant is not managing the project. Under the prequalification process, the named key persons must be deployed to the project or the owner may impose financial penalties. –– Contractor prequalification is often the focus of controversy. The problem generally experienced by owners attempting to prequalify contractors is that it is difficult to be objective. Most state procurement regulations demand objectivity because of potential bidder discontent and the potential for protests. For example, a politically well-connected contractor can bring enormous pressure to bear on the agency developing the prequalification criteria (metrics). Similarly, an owner with a negative bias against a specific contractor can seek to exclude that contractor by way of the prequalification criteria. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Contracts 145 3. The shortlisting process seeks to minimize the subjectivity of prequalification criteria by publicly issuing a request for qualification document that avoids the establishment of subjective criteria (e.g., a certain number of linear feet of pressurized face tunneling, or a certain number of pressurized face tunneling projects) and requires the submittal of qualification data on projects of similar scope and complexity. The owner agency then evaluates all qualification documents and selects the most qualified firms, based on well-publicized scoring criteria, which are then offered the opportunity to submit proposals or bids. The number of firms to be shortlisted is established in the request for proposal (RFP), and the shortlisting of the three or four prospective bidders that are best qualified both ensures economic competition and increases attention from high-performing firms, while avoiding labeling prospective bidders as “not qualified.” Both the prequalification and the shortlisting processes require additional time in the procurement cycle. Best practices allow sufficient time for the preparation of a quality qualification document, evaluation thereof, and allowance for protest period before the advertisement or release of the RFP. The amount of time required is highly dependent on the complexity of the project and on the criteria developed to evaluate the proposers. In the absence of formal prequalification of the contracting firms, owners often contractually stipulate the qualifications of individuals that direct, supervise, or perform the work. The technical specifications often contain minimum qualifications for personnel or equipment, which are administered and enforced after contract award. These personnel post-qualifications are considered a good practice because they give the owner some control over the construction and a level of assurance that the work is being directed by competent people. C O N C LU S I O N S AND RECOM M END ATI ON S Successful underground construction contracting requires that both parties believe they are engaged in a fair contract and that their reward for the known risk is fully within their control. Owners carry most of the responsibility for selecting procurement and pricing methods and preparing contract documents that promote the achievement of this goal. This chapter makes the following recommendations related to underground construction contracts. ■■ Recommendation 10-1: A procurement model, including both delivery and pricing methods, should be chosen based on careful and informed deliberation of all aspects of the project, as well as a self-assessment of the owner’s own organization’s capability to administer the selected procurement approach within its established procurement and administrative guidelines. ■■ Recommendation 10-2: In accordance with the Brooks Act, designers and other professional service providers should be selected based on verifiable and well-researched qualifications rather than price. ■■ Recommendation 10-3: Owner organizations should seek advice from engineers and attorneys with underground contracting experience and adopt fair and balanced terms and conditions, considering underground industry standard practices that will solicit competitive proposals from qualified construction contractors. The contract terms and conditions should clearly reflect the procurement approach, unique site conditions, risks, and corresponding responsibilities of the parties. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 10 146 ■■ Recommendation 10-4: Owners should verify that bidders are qualified, by either establishing a prequalification or shortlisting program. Such a program should be project specific, transparent, auditable, and not overly burdensome to attract the responses from the most qualified and experienced firms. RE FE R E N C E S 41 USC 3309. 2011. Public contracts: Design-build selection procedures. Washington, DC: U.S. Government Printing Office. AIA (American Institute of Architects). 2019. AIA contract documents. www.aiacontracts .org. Accessed January 2019. American Law Institute. 1981. Section 1: Contract defined. In Restatement (Second) of the Law of Contracts. Philadelphia: American Law Institute. Audit Office of New South Wales. 2003. Executive summary. In Auditor General’s Report— Performance Audit: Sydney Water Corporation—Northside Storage Tunnel Project. Sydney, Australia: Audit Office of New South Wales. Bedell, A.L., Horton K., Del Nero D., et al. 2018. Pre-excavation grouting at the Hemphill Site—Atlanta WSP Tunnel. In North American Tunneling: 2018 Proceedings. Edited by A. Howard, B. Campbell, D. Penrice, et al. Englewood, CO: SME. Brierley, G., Corkum, D., and Hatem D., eds. 2010. Design-Build: Subsurface Projects, 2nd ed. Littleton, CO: SME. ConsensusDocs. 2019. Contract document series. www.consensusdocs.org. Accessed January 2019. DBIA (Design-Build Institute of America). 2017. Progressive Design-Build: Design-Build Procured with a Progressive Design & Price: A Design-Build Done Right Primer. Washington, DC: DBIA. Edgerton, W.W. 2000. Ensuring your contractor is qualified, part 1. In North American Tunneling: 2000 Proceedings. Edited by L. Ozdemir. Rotterdam, The Netherlands: A.A. Balkema. EJCDC (Engineers Joint Contract Documents Committee). 2019. EJCDC knowledge base. www.ejcdc.org. Accessed January 2019. Gribbon, P., Irwin G., Colzani G., et al. 2003. Portland, Oregon’s alternative contract approach to tackle a complex underground project. In Rapid Excavation and Tunneling Conference: 2003 Proceedings. Edited by R.A. Robinson and J.M. Marquardt. Littleton, CO: SME. Gribbon, P., Colzani G., Strid J., et al. 2007. Portland, Oregon’s alternative contract approach—A final summary. In Rapid Excavation and Tunneling Conference: 2007 Proceedings. Edited by M.T. Traylor and J.W. Townsend. Littleton, CO: SME. McDonald, J.F. 1995. Case study of the New St. Clair River Tunnel. In Rapid Excavation and Tunneling Conference: 1995 Proceedings. Edited by G. Williamson. Littleton, CO: SME. USNCTT (U.S. National Committee on Tunneling Technology). 1974. Better Contracting for Underground Construction. Washington, DC: National Academy of Sciences. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 111 Changes I N TR O D U C TION A changes clause is a common provision in construction contracts. It gives the owner authority to make changes to the contract without triggering a breach, and it establishes a systematic method for pricing and incorporating changed and extra work into the contract. Typically, the changes language is a part of the general conditions and includes provisions that describe the processes by which changes are identified, documented, priced, negotiated, and agreed to. The specific issues covered by the changes clause, and the relationship of the changes clause to other parts of the contract (e.g., claims and disputes), vary among owner agencies and depend largely on how the agency manages its procurement system and administers contracts. Forward-thinking change provisions provide owners an opportunity to include mechanisms for efficiently identifying entitlement to additional costs and time and a straightforward methodology for quantum determination. If they are equitable and well written, changes clauses have the potential to benefit the contracting parties in three key ways: 1. They encourage contractors to bid by assuring them that they will be adequately compensated for changed work. 2. They minimize bidding contingencies. 3. They make it easier for both parties to incorporate the impact (time and cost) of the changed work into the contract. Forward-thinking change provisions provide owners an opportunity to include mechanisms for efficiently identifying entitlement to additional costs and time and a straightforward methodology for quantum determination. Unfortunately, in the underground industry, many of the changes provisions currently in use are either demonstrably inequitable or perceived as such by bidders. Changes to designs and differing site conditions continue to be among the most disputed contract issues in the Image courtesy of the San Francisco Public Utilities Commission. Photographer Katherine DuTiel Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 147 Chapter 11 148 underground construction industry. The current environment for heavy civil contracting calls for aggressive proactive measures that pragmatically plan for change. It is beyond the scope of this chapter (or this book) to describe, confront, and suggest alternative approaches for the myriad areas of possible disputes related to changes. This chapter presents the typical contracting tools used to address changes and suggests appropriate upgrades that may allow the contracting parties to expeditiously reach a fair and reasonable resolution of disputed issues. The goal is to avoid escalation to the point where claims are filed, positions harden, and project resources are diverted from planning the future work; and to instead, start flowing toward resolving past issues. Another goal is to incentivize fair resolution at the earliest opportunity. This chapter includes a discussion of methods to avoid changes, issues associated with notice, ways in which merit is determined, differing site conditions, force majeure, and pricing methodology. Also examined are issues specific to the underground industry associated with various elements of cost; how and whether to compensate for extended overhead; and percentage add-ons for overhead, profit, and performance bond. In addition, there is a discussion of complications that occur when a contractor bids to finish earlier than the contract time. CH A N G E A V O I D ANCE Previous chapters cover the importance of project planning (see Chapter 2) and understanding subsurface conditions (see Chapter 3) in seeking to avoid changes. An important tool in change avoidance is the risk management process (see Chapter 4) of risk identification and implementation of risk mitigation actions. In addition, many chapters of this book have emphasized that it is impossible to have perfect knowledge of subsurface conditions or airtight project designs. As a result, and given that unanticipated issues lead to increased costs and time, owners should evaluate the benefits of incorporating change avoidance ideas. Following are some of the questions worth asking as part of this evaluation: ■■ What would be the potential return on investment from a more detailed site investigation, or phasing elements of the work to allow phasing of the design process? ■■ If the demolition of an existing building precludes detailed soil testing, could a separate contract be crafted that would first allow demolition then soil testing during the design phase, rather than including a best guess interpretative statement in a geotechnical baseline report (GBR)? ■■ Would the project benefit from overlapping the design and construction phases so that a contractor can review and comment on design details prior to submitting its construction bid? At a certain point, and especially where funding deadlines loom, an owner must move forward with final design and construction. It is not unusual that, given the press of time and third-party commitments, a project moves forward with the parties recognizing that there will be changes. However, where the luxury of time exists for extra investigation or review, an owner will not likely regret the belt and suspenders approach. Low bid requirements promote competition and facilitate transparency but come with their own drawbacks. A low-bid contractor that starts the job with self-inflicted damage such as a bid mistake is seldom a cooperative contractor. Low-bid scenarios are associated Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Changes 149 with adversarial relationships among the contracting parties, a high volume of disputed change orders and claims, threats to quality of work, delays in meeting contract durations, and other factors that threaten satisfactory project completion. An owner with the ability to use bid methodologies other than low bid is fortunate. Readers are encouraged to review how other states, localities, and countries handle bid awards, particularly the average bid method (Shrestha 2014) or the use of two-phased or best value procurement models (see Chapter 10). Construction professionals and legislators may want to encourage changes in procurement methodologies as the best way to launch projects on a sounder contracting path that will result in more predictable completion time and cost results. A low-bid contractor that starts the job with self-inflicted damage such as a bid mistake is seldom a cooperative contractor. N O TI C E Most construction agreements require that the contractor provide written notice when an owner’s act, direction, or encountered ground conditions could result in a contract change. Some agencies require immediate notification, a term subject to interpretation. Others stipulate a period of anywhere from 5 to 20 days after the event giving rise to the change. The bottom line is that notice should be timely. The primary purpose of the notice requirement is to give the owner an opportunity to investigate the situation and mitigate the real or potential impacts before the contractor performs work that could expose the owner to additional cost or to schedule delays. (Some states permit or require a strict waiver that precludes the contractor from receiving additional compensation if notice is not provided within the specified time frame. A discussion of the strict waiver rule is beyond the scope of this book.) In the case of a differing site condition related to underground construction, it is important that the owner be offered the opportunity to investigate before the conditions are disturbed or covered up so that the parties can agree on how best to address the different conditions. Most notice provisions establish a procedure for the owner and contractor to reach agreement about the nature, cost, and schedule impact of the contract change. Generally, the procedure is as follows: 1. The contractor provides notice of the impacting event. 2. The owner’s representative investigates the circumstances surrounding the event and responds to the contractor. 3. The contractor provides a detailed proposal requesting an adjustment to the contract price and/or the schedule. 4. The owner’s representative evaluates the merit of the request for change. a. If the change is found to be necessary, the parties negotiate the cost and schedule impacts. If they reach agreement, a change order is issued. If not, the contractor files a claim in accordance with the contract provisions. b. If merit is denied, and the contractor wants to pursue the change request, the contractor must file a claim. The time frames allowed for these steps vary. Most provisions specify that the contractor must provide the proposal requesting adjustment within a certain period, typically 15 to 30 days. The time allowed for the owner to review the proposal varies, and many agencies Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 150 Chapter 11 put no time limit on their responses. Following are two main issues associated with these time frames: 1. Scope uncertainty. Because the scope of the change may be uncertain, it may not be feasible for the contractor’s jobsite staff to prepare a complete cost and time proposal within 30 days. Even if it is possible, additional impacts often surface after the relatively short proposal time frame specified. To account for this, the contractor frequently includes reservation of rights language in its proposal, which the contractor views as a reasonable way to meet contractual requirements while reserving its right to additional time and/or money as impacts are fully realized. Owners, conversely, often view reservation of rights language as either the contractor’s first step in seeking compensation that is overreaching or, worse, evidence of intent to fabricate impacts later. This misunderstanding creates a disruptive and adversarial environment and can prevent the parties from reaching agreement on the impact of changes. 2. Time constraint. Contractors are often not able to prepare a detailed proposal because the contractor’s jobsite staff is busy planning and managing the project, and it costs the contractor money to bring someone else in to prepare a detailed cost and time proposal. This additional cost is not normally compensable. As a result, contractors often delay submission of cost and time proposals until the jobsite staff has the time. To minimize disputes associated with these issues, contract provisions should allow the contractor sufficient time to gather information and realistically calculate the cost and time impacts of a change. The time allowed could depend on the complexity of the alleged change, or the provision could allow the contractor to apply for extensions to deal with complex changes. By the same token, the time allowed for the owner to review proposals should permit sufficient analysis but be short enough not to stall the job. It may also be possible for the owner to avoid delays to change negotiations by periodically updating the review status and establishing target dates for resolution. Both the owner and the contractor should ensure that their staffs recognize that the contract language establishes the rights and responsibilities of both parties regarding the administration of changes. And it is the duty of both parties to act professionally to fulfill these responsibilities. Sometimes the contractor’s project staff is reluctant to provide proper and timely notice, under the assumption that the owner’s representative will be irritated, thus making it more difficult to obtain cooperation in the field on other matters. This attempt to appease the owner’s representative usually backfires if and when the owner realizes the contractor has been withholding information regarding the potential impacts of changes. The result is often a breakdown in communication on all sides. Notice provisions are extremely important in safeguarding the contractor’s ability to obtain additional compensation and enabling the owner to be proactive in mitigating the potential impacts of unforeseen changes in the work. Both the owner and the contractor should ensure that their staffs recognize that the contract language establishes the rights and responsibilities of both parties regarding the administration of changes. And it is the duty of both parties to act professionally to fulfill these responsibilities. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Changes 151 D E TE R M I N I N G M ERI T A change has merit when the contractor is entitled to the change. Entitlement is clear-cut when the owner initiates a request to the contractor to add new or different work. Such work is typically instigated by a proposed change order, proposed contract change, change notice, or other owner-requested change document. Such changes must be within the nature and character of the original contract scope and entitle the contractor to submit a cost/time proposal. Contracts may either authorize the owner to direct the work to occur immediately and establish a methodology for payment (discussed in a following section), or withhold authorization to proceed until a modification has been issued. Entitlement is less clear-cut in cases where the owner has responded to a submittal or request for information and the contractor interprets that response as a change. Design documents consist of specifications and drawings that describe the work in a prescriptive fashion (as a mandate for compliance) or alternatively in a looser fashion that provides the contractor some leeway in meeting performance criteria (see Chapter 5). En route from design to implementation, questions can and do arise that result in clarifications to the contract documents. Often, the contractor will assert that such clarifications resulted in a material change to the work. Provisions should be in place requiring the contractor to notify the owner in a timely manner of its position on any cost/time impacts in order to assist the owner in mitigation efforts, through either alternative clarifications or other methods. The contractor bears the burden of demonstrating the reasonableness of its position that a clarification is material. Materiality is demonstrated by proving that the contractor will incur excess costs/time to implement the clarification. Often, a contractor will submit a request for entitlement without substantiation of alleged cost/time impacts. If the contractor’s theoretical argument supports entitlement, the owner should not hesitate to issue a finding of entitlement. D I F F E R I N G SI TE COND I TI ONS A staple of most public construction contracts, the differing site conditions (DSC) clause is designed to eliminate or minimize bidder contingencies by providing a mechanism through which contractors can receive additional compensation if the conditions encountered on the project materially differ from, and make the performance of the work more costly than, the conditions identified in the contract documents and relied on by the contractor when preparing the bid. Although the federal DSC language has not been changed for more than 30 years, some owners have attempted to modify the clause for their specific underground projects. As the GBR came into common use, some agencies changed the definition of the Type 1 DSC from the traditional language: “… differ[ing] materially from those indicated in this contract…” to the revised “… differ[ing] materially from those indicated in the GBR.” This rewording reflects the primacy of the GBR as the contractual indicator of the geotechnical elements of the work. The industry offers varying opinions about this change: ■■ If the DSC clause stipulates the GBR to be the authoritative document, the contractor will not make tortuous interpretations of other documents, such as the geotechnical data report (GDR), and thereby create a document conflict argument. (More information on the GBR and GDR is found in Chapter 3.) Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 11 152 ■■ The GBR cannot possibly include all factors relied on by bidders in preparing their bids; and referencing only the GBR in the DSC limits bidders’ use or interpretation of other potentially critical documents, such as payment provisions, drawings, and geotechnical data. In addition, DSC clauses that restrict contract indications to the GBR may result in higher bidder contingencies, thereby essentially negating the purpose of the DSC clause (Stolz 2002). ■■ Despite the existence of an order of precedence clause, the owner/engineer has a responsibility to create contract documents that do not conflict with each other. Some argue that the DSC clause should not be modified to shield the owner/engineer from this responsibility. Differing conditions may also apply in the case of unknown utilities or other obstructions to subsurface excavations. Where the specifications require that the contractor confirm the locations of utilities through potholing, it is typical to specify that potholing be completed prior to the scheduled start of the work in that area so that there would be time for the owner to investigate and provide a workaround if what is uncovered represents a differing condition. It is not good practice for the contractor to begin work and call it potholing. Conversely, a potholing clause does not provide insurance against DSC changes. Typical DSC language states that “… an equitable adjustment [emphasis added] shall be made under this clause and the contract modified … accordingly” (48 CFR 52.236-2[b]). However, this language often does not directly correspond to or reference the changes clause, which in turn frequently does not mention the term equitable adjustment and may not be perceived as being equitable. Indeed, the owner may not have intended the changes clause to be equitable, but simply to establish an administrative procedure to process changes. Thus, the requirement that the DSC result in an equitable adjustment may cause even greater confusion about how adjustments are to be made. Referencing the changes clause in the DSC clause is one way to avoid this. Challenging DSC entitlement determinations do not get any easier the longer they sit. Owners are encouraged to meet with contractors at the earliest opportunity and make a record of the process that will be used to investigate entitlement and to track costs pending the entitlement determination. The ostrich method of ignoring the issue and insisting it is up to the contractor to resolve it is not appropriate. The owner should actively engage in discussions to mitigate cost/time impacts even where entitlement is not clear. One mitigation method might be to direct acceleration of the work as a precautionary measure against delayed completion. However, failing to address the problem in a timely manner may result in lost opportunities to accelerate, and the consequences of delayed completion increase the stakes for any future liability determination. F OR C E M A J E U RE Construction contracts usually include a definition of a force majeure event and allow a noncompensable extension of time if such an event delays completion of the work. The philosophy behind the force majeure clause is that both parties should bear their own financial burden from an event over which neither party has control. For the owner, this typically means granting a time extension. For the contractor, it typically means relief of liquidated damages but no additional compensation for the resulting impacts. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Changes 153 However, owner agencies do not share a single definition of force majeure events. In most cases, acts of God and the public enemy, strikes, lockouts, fire, unusually severe weather, floods, and the government acting in its sovereign authority all qualify. But some agencies treat strikes and similar labor disturbances as avoidable delays, for which the contractor is not entitled to a time extension. Presumably this is because the owner believes that the contractor can control the labor unrest, or at least can control it better than the owner can. Although this may be true in some instances, particularly where the contractor manages the entire labor pool (e.g., in a remote project location requiring camp living), in urban locations where many underground projects are implemented, the contractor usually has very limited control over labor disputes that result in work stoppages and subsequent delays. (In some cases, the contractor or owner can mitigate such disputes through implementation of a project labor agreement or a dual or reserve gate system.) With the exception of project-specific work stoppages resulting from the contractor’s actions, general labor unrest should be included as an allowable force majeure event. The other major force majeure issue that is frequently a source of dispute is the allowance of time extensions for unusually severe weather. The definition of unusually severe weather differs by jurisdiction, and many public agencies do not define it at all, leaving the parties to determine it during construction. Some factors are the amount of precipitation; number of days of precipitation greater than a certain amount; temperature extremes; and, in some cases, high winds. All of these depend on the type of work and local trades practice. Agencies differ in their methods of defining unusually severe weather, but many refer to historical norms as determined by the National Oceanic and Atmospheric Administration. Aside from the inclusion of the definition of unusually severe weather in the contract language, the question of what weather qualifies as unusually severe is frequently contentious. Two methods in particular are used to make this determination: 1. Specify that severe weather delays are those that extend beyond a certain number of standard deviations (e.g., one) from the normal weather. The contractor is responsible for determining what normal weather is and factoring normal weather into its schedule. 2. Include a provision that stipulates the number of normal weather days that must be included in the contractor’s base schedule. Time extensions for unusually severe weather can then be based on a comparison of the defined normal weather and the weather days actually experienced that stopped the critical path work. In either of these cases, once weather has been determined to be severe, an evaluation of critical path activities must be made and time extensions granted to the extent that the severe weather prevented critical path activities from being accomplished. Although much of the work in an underground project is not subject to the weather, the project itself can be affected by severe weather as a result of impacts on transportation of materials and closures of disposal sites. P R I C I N G M E TH OD OL OGY The changes clause typically establishes pricing provisions that define how a contractor will be compensated for changes to the work. Specifically, the purpose of such pricing provisions is to establish in advance a means for reaching agreement on price and time adjustments. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 154 Chapter 11 By executing the contract, the parties agree to agree on the time and cost effects of subsequent changes to the contract documents, as included in the changes clause, provided the changes are of the same nature and character of work. Although many provisions establish what may appear to be arbitrary pricing formulas, they are actually an attempt to lay out an administrative procedure for processing changes. The pricing provision procedures are often stated in excruciating detail and, like the other provisions discussed in this chapter, vary by jurisdiction. Most contracts specify that changes can be priced in one of the following ways: as a lump sum; by unit price; or by time and materials (T&M), sometimes referred to as the force account method. Although most agencies prefer to reach an agreement about the pricing method before work begins, sometimes the parties cannot agree on either a lump sum amount or the use of an existing unit price. In such cases, contract language stipulates that records be kept of the labor, materials, and equipment used and that the T&M method be used to calculate the additional compensation due. There can be myriad provisions provided to guide a cost analysis, and customary practices in the industry will be tossed into the mix if a dispute arises. Owners and contractors are encouraged to establish early agreements on frequently disputed items: approved labor rates; reimbursable burdens (including worker’s compensation and federal and state unemployment taxes); equipment rates that will be reimbursed for rented versus contractor-owned equipment; materials; and the type of documentation to justify all costs, application of taxes, bonds, and insurance. For changes priced using the lump sum method, most agencies (and their auditors) require details that enable them to validate the cost of the change. It is typical to use the procedures provided in the T&M section of the contract to determine allowable labor, material, equipment, supplies, and subcontract work associated with the change, plus the stipulated overhead and profit. Contract provisions seek to use unit prices for changed work “to the extent such unit prices are applicable to the changed work.” In many cases they are not applicable, for multiple reasons. Many protracted contractual disputes have been centered on the use of bid items for pricing contract changes that may or may not be fully aligned to the scope of the original work. This is especially true with deductive changes that eliminate portions of the work. The use of as-bid unit prices to changed work scopes, either additive or deductive, depends on agreement among the parties. In some cases, however, unit pricing presents an opportunity to pre-price potential change work using the economic competition available during the bidding process and should be used when applicable. For example, for mining using the sequential excavation method (SEM), contractors will often be asked to bid provisional unit prices for SEM toolbox work. Owners may want to clarify whether delay impacts will be separately evaluated and in what manner. T&M tracked using owner-approved documentation presents a sound default methodology for tracking costs for additional work but may not encourage construction in the most economical manner. For that reason, the owner should encourage and facilitate use of other cost methods. A contractor may be more agreeable to forging ahead on disputed additional work if the owner agrees to participate in the tracking of what may be disputed costs. If the owner tracks the costs, it should also participate in recommending mitigations to any alleged delay. The owner’s recommendations should be a part of the history of the dispute. Tracking of design costs for changed work in a design-build (DB) contract Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Changes 155 represents another difficulty, in that many times such work is done remotely in a design office where the construction manager has limited oversight ability. Ideally, most merited changes would be priced in a timely manner and negotiated using the lump sum negotiation method to assure the contractor that a contract modification will be in place to reimburse the contractor when the work is complete. As was mentioned in Chapter 9, it may be helpful for the owner to plan ahead for such additional work—for example, work that would commonly be expected on such a project but is not priced in the contract—by including provisional payment or allowance payment terms to include funding in the contract to cover these costs. Provisional or allowance payment terms provide a ready vehicle for payment that bypasses typically bureaucratic approval and authorization processes. However, if these terms are used, it is still necessary to make a record of the cost basis. For projects using federal money, best practices require that the owner prepare an independent cost estimate prior to receiving the contractor’s cost proposal.* Once the cost proposal is received, the parties meet and compare costs for elements and sub-elements of the work and make a record to support the outcome of negotiation. In a perfect world, the parties agree on a mutually satisfactory outcome. In the real world, there can be a difference of opinion that causes an impasse. To the extent that the work must proceed in the field, and to avoid forcing the contractor to finance work for which it is clearly entitled payment, the owner may issue a unilateral contract modification. This allows payment of at least the undisputed amounts, and the amounts related to the disagreement can be disputed in accordance with the disputes clause of the contract. To encourage pre-pricing of changes using the lump sum approach, owners may want to establish in the contract a preferred format for cost proposals and incentivize contractors and subcontractors adhering to that format. Some agencies allow a higher profit percentage to be used for pre-priced changes when the lump sum method is being used, reasoning that because contractors take the risk of performance, they are entitled to be compensated for that risk in the form of additional profit. This method benefits both parties because of the significant costs associated with collecting data and administering T&M work (see discussion on determining profit percentages in the “Overhead and Profit” section). E LE M E N TS OF COST The elements of cost that can be compensated in the change order are usually spelled out in some detail, and include labor, materials, equipment, supplies, and special plants and equipment. Actual labor includes field supervisors but excludes superintendents and general supervisors, because they are considered part of the overhead, unless such supervision is required specifically for the changed work. Some agencies allow the inclusion of actual demonstrated cost, including subsistence, and others limit the allowable cost to the predetermined prevailing wage rate. In most cases there is not much difference, but in times of labor shortage and for long-duration contracts such as tunnels, the difference can be significant. Proportioning the cost of logistic or support labor can also be difficult and is often disputed, particularly in underground construction where 20%–30% of the entire labor force may be * With respect to evaluating changes during design and construction on transit projects: “Project Sponsors are encouraged to establish a Change Control Board (CCB) with charge to attain independent and thorough cost/ schedule/functionality reviews ….” (FTA 2016). Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 156 Chapter 11 involved in supporting the tunnel operations. In DB contracts, there may be design changes that require additional work by the design team. Contract provisions must allow for the inclusion of professional services associated with this work. Allowed cost of materials recognizes trade discounts that were taken or could have been taken. Although there is typically very little dispute about compensation for permanent materials incorporated into the changed or extra work, disputes do arise over normal wastage, and the temporary materials and supplies consumed in the performance of the extra work. Contract provisions may allow compensation for these temporary materials. For equipment rented from third parties, rental invoices are available to document the added cost of equipment used in the performance of extra or changed work. However, the costs for use of contractor-owned equipment can be more difficult to quantify. Also, it is not uncommon for the contractor or the joint venture entity holding the prime contract to rent equipment to the project, either from a wholly owned subsidiary or a sister company that may be controlled by the same owner. Rental rates from such entities should be compared to rates published by arms-length rental companies or, if not available, the equipment should be treated as owned equipment. Allowable rates vary significantly among agencies, and most underground equipment is not listed in published rate manuals, leading to potential disagreements about what is a reasonable rate. This is particularly true when the agency standard clause references a highway department rate manual that does not include underground equipment. To determine a reasonable rental rate for underground equipment, it is necessary to consider several factors, including the original cost of the equipment, tax and freight, usable economic life, annual use, salvage value, job severity, regional factors, and overhaul allowances. Another important consideration in determining reasonable rental rates is the allowance made for ownership costs during periods of standby and multiple shift operations, both of which are common in underground construction. Rate manuals such as those issued by EquipmentWatch (e.g., Residual Values Report, 2017) or the U.S. Army Corps of Engineers (e.g., Construction Equipment Ownership and Operating Expense Schedule, 2016) establish methods for calculating reasonable equipment rates. It is recommended that the standard general conditions provisions be modified to include a supplemental general condition article that would incorporate the equipment changes recommended for underground construction. Supplies are often neglected in the standard changes clause. Some owners refuse to include any provision for the contractor’s use of materials not incorporated into the work, such as safety gear and temporary materials, or small tools costing less than a stipulated amount, because the owners assume that such costs are included in the overhead allowance. Other owners include a provision allowing a fixed percentage of labor (e.g., 2%–5%) to cover small tools and supplies. To determine the actual cost of changed work, this element of cost should be recognized as allowable by either including a stipulated percentage or establishing a job-specific percentage based on the actual direct costs of small tools and supplies, as indicated in the contractor’s accounting system, and applying this percentage to all allowable labor costs included in the change. The special plant and equipment used on an underground project are usually dedicated to that specific job. Examples include the tunnel boring machine and trailing gear, and major plant items such as personnel hoists and linear plant elements that are used throughout the project. This is not rented equipment in the normal sense, in that it is not usually moved on and off the jobsite, because moving it to another project usually requires a major overhaul. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Changes 157 Thus, the cost of using this special plant and equipment is more appropriately represented by a purchase-and-salvage rather than a rental approach. Many contracts make provisions for payment of equipment mobilization to compensate contractors in advance for major purchases and to reduce the need for them to finance the projects with their own money (see Chapter 9). When such mobilization payments are based in some manner on the initial purchase cost of the special plant and equipment, many owners believe that it is not equitable to be charged again for the ownership portion of the rental when the contractor suffers a compensable delay or is performing additional work. The special plant and equipment were purchased in the bid price for the entire project, however long it takes to complete. Some projects have included a contract provision that any equipment ownership costs that were compensated in the mobilization payment may not be included in any subsequent change orders. Contractors argue that such a provision denies them the opportunity to plan for use of this equipment on subsequent projects, and that if the equipment is not on standby but working during the added construction time (as might be the case with lower productivity resulting from a DSC), additional payments for ownership costs compensate for increased depreciation and/or loss of salvage value. Recognizing these issues, some agencies compensate the contractor for the time-value of the established salvage cost during the delay period. E X TE N D E D OV ERH EAD The reverse of the levy of liquidated damages against the contractor for unexcused delay is the owner’s responsibility for costs associated with the contractor staying on the job longer because of an excusable delay. Contracts typically include provisions recognizing the right for the contractor to receive an equitable adjustment for the costs associated with staying on the job longer. Proof of delay generally relies on critical path methodology, which should be required by the contract (see Chapter 8). In the case of such delays, the contractual markup to reimburse the contractor for its efforts in implementing and managing additional work would not be sufficient to reimburse for the extended overhead associated with (1) being on a job longer, and (2) being unable to move to the next job. Different common law standards exist for reviewing delay damages. Application of the Eichleay formula is one approach (Kauffman and Holman 1995). An emerging practice is to avoid the use of the Eichleay formula and instead require the contractor to bid a daily rate for delay intended to reimburse all time-related costs not otherwise allowable as direct costs under the changes clause. This daily rate would be used for any critical path delay for which the owner is solely responsible. (It may be obvious, but to have an agreed-on critical path delay, there must be an agreed-on schedule; see Chapter 8.) The owner’s recognition of costs that affect the contractor’s operations and the establishment of an equitable means for compensating the contractor for changed work help reduce potential disputes in this area. Contract language should be very clear about the delay conditions and methods of measurement for such payment items. For example, if the delay period occurs during tunneling, the daily rate could be significantly different than if the delay period occurred during design (on a DB project) or just before substantial completion. It is customary in the construction industry to limit the reimbursement of extended overhead damages to excusable delay that impacts the contractor’s ability to complete its Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 11 158 work within the agreed duration. Increasingly, contractors and subcontractors seek to extend the principle of equitable adjustment to delays to the work that extend the duration of sub-elements of the work that may not impact the overall duration of the project. Anyone can appreciate that when a subcontractor stays on a job longer than expected, that subcontractor may have extended overhead costs. Although these cost issues should not automatically be deemed costs for which the owner is liable, it is important that both owners and contractors recognize the reality that a subcontractor in that circumstance loses all incentive to efficiently manage the job without some mechanism for being compensated for unmitigated delays. Effective changes provisions pertaining to delay will clearly notify contractors of two things: (1) the opportunity to be reimbursed for excess costs incurred to mitigate delay arising from the additional work, and (2) the owner’s nonliability for delay costs that potentially arise from the contractor’s lack of diligence in mitigating the delay. Owners must be hands-on in reviewing and agreeing to additional efforts to mitigate delay. O V E R H E A D A N D PROF I T Some agencies establish the allowable percentage to be added for overhead and profit by adding a set percentage to the total direct costs. Some add one percentage on the labor, a different percentage on materials, another on equipment, and so forth, to represent both overhead and profit. When combined, these percentages are sometimes referred to as margin or fee. Other owners, recognizing that overhead and profit are separate elements, stipulate one percentage for overhead and another for profit. Contractors often argue that the overhead and profit rates allowed by contracts are insufficient to compensate for costs associated with changed and extra work. The sufficiency of the overhead allowance is often determined by whether the changed or extra work requires the contractor to extend its schedule and thus incur additional time-related overhead costs. The pertinent questions are: Was the changed or extra work on the critical path? And was the contractor delayed in completion of the critical path work? ■■ Some changes only affect direct cost, are not on the critical path, and thus do not increase the time to complete the project as a whole. In these cases, a percentage of the direct cost overhead allowance is typically sufficient to cover the contractor’s costs in administering, pricing, negotiating, planning, and scheduling the extra work. ■■ Other changes have a small direct cost, resulting in a relatively small allowance for overhead using the add-on overhead percentage; however, these small changes can affect the critical path and the overall project duration. In such a case, the stipulated overhead rate might be insufficient to compensate the contractor for the extended overhead and other time-related costs, which can be significant on an underground project (see the preceding “Extended Overhead” section). Establishment of contract terms and conditions that separately recognize the direct and time-related costs associated with changed work would be a significant step forward in minimizing disputes over the negotiation of changes. Many contracts do not allow the prime contractor to put any markup on the value of a subcontractor’s changed work. This practice does not recognize the additional work involved in administering the change, including required revisions to the payment schedule Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Changes 159 and integration into the overall work process. Because the bidding contractor cannot be expected to include costs in the original bid price to administer an unknown volume of changes, it is recommended that a markup allowance be included for the prime contractor on subcontract changes. The allowances for overhead and profit are a sensitive topic for many owner agencies. Some owners argue that combined overhead and profit percentages in the 10%–20% range are specified to discourage contractors from bidding low on the base contract and making money on the changes. Many contractors respond that they never approach bid estimates in this manner but make money on the job by bidding the work as shown on the drawings and finding ways to complete the contract work faster and/or more efficiently. Changes do not help accomplish this objective because they disrupt the contractor’s planned economical sequence of work. As a result, most underground contractors report that they would prefer not getting any changed or extra work. Indeed, the overhead and profit percentages should be high enough that the contractor does not resist performing the changed or extra work. Some guidance is provided by the federal government, which addresses the issue of equitable or reasonable profit in the Federal Acquisition Regulations. When analyzing and/ or negotiating profit, the government evaluates contractor effort, contract cost risk, federal socioeconomic programs, capital investment, cost control and other past accomplishments, and independent development (48 CFR 15.404-4[d]). Owners may wish to take into account these same factors when establishing an equitable profit markup for changes. On DB projects, the contractor’s designer is often asked to make changes that may be compensated by the owner in a change order. Overhead markups on design firms are calculated differently than overhead on construction firms. It is not uncommon for designers to work on provisional rates until such time as audited rates can be made available. The changes clause should define the basis for approving allowable overhead rates for professional services. Not all contract changes involve increased work. Some changes result in less work and therefore deductions to the contract price. Many agencies use the same overhead and profit percentages for deductions as they do for additions. This can result in a credit for overhead, when the contractor is actually doing more work in completing the changes to pricing, negotiating, rescheduling, and so forth. Contract documents that make the credit for deducted work equal to the sum of the direct cost and the profit, excluding overhead, more closely match the compensation to the cost of performing the changed work. Such a policy is recommended. P E R FO R M A N C E BOND The allowance for the cost of the performance bond (see Chapter 13 for a discussion of performance bonds) widely varies across agencies. The contractor pays an initial premium based on the estimated contract value, which can be a significant amount on an underground project. Most agencies make allowance for this up-front cost in the initial mobilization payment. However, because the final premium is based on the final cost of the work, most agencies also make a separate allowance for bond cost in each change order, based on the subtotal of direct cost, overhead, and profit. Some agencies use the actual rate based on the initial payment, and others stipulate an arbitrary percentage. In some cases, additional Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 11 160 compensation for the bond premium is deferred until the final payment, when an adjusting change order is executed, based on verified additional charges, which reconciles all additions and deletions. B I D D I N G TO FI NI SH EARL Y Some owners have adopted the philosophy that the bid price should include all the time-related costs for the entire length of the allowed contract time. These contracts include provisions that disallow compensation for time extensions unless the revised completion date extends past the date originally established in the contract. This discourages bidders that believe they can finish early from reducing their bid price to reflect innovative approaches. In such a case, either the owner pays for the time-related costs associated with changed work, whether it ever happens, or the low bidder excludes these costs. And when changes result in a noncompensable time extension, the job environment may turn adversarial. It is recommended that the contract provisions be very clear as to the owner’s position on the contractor’s right to finish early, to avoid any misunderstandings during contract performance. CO N C LU S I O N S AND RECOM M END ATI ONS To avoid disputes, the contract documents should define a method by which the contractor and all subcontractors are equitably compensated for changes in a manner that can be justified by the owner. It is recognized that construction contracts operate in statutory and regulatory environments, which may differ from jurisdiction to jurisdiction, and therefore owner agencies may not be able to adopt all these recommendations. Nonetheless, it is expected that a shared understanding of the benefits of equitable changes clauses will benefit all parties by promoting more competitive bid prices and minimizing disputes. ■■ Recommendation 11-1: Owners should consider benefits to be obtained from incorporating change avoidance concepts during the design development, and by use of contract awards to other than the low bidder, for example, by evaluating technical proposals as part of a best value or two-phase procurement process. ■■ Recommendation 11-2: Contract provisions regarding change proposals should allow the contractor sufficient time to calculate cost and schedule impacts and the owner sufficient time for analysis, but the allowed time should be short enough to keep the issue from stalling the job. The provisions should allow the contractor to apply for extensions to deal with complex changes. ■■ Recommendation 11-3: The differing site conditions clause should not specify relief by equitable adjustment but instead should reference the administrative provisions of the changes clause for the calculation of the allowable cost and time adjustment. ■■ Recommendation 11-4: The owner should actively engage in discussions to mitigate cost/time impacts of differing site conditions in a timely manner, even where entitlement is not clear, as by so doing, the consequences of delays and increased cost are minimized. ■■ Recommendation 11-5: With the exception of project-specific work stoppages resulting from the contractor’s actions, general labor unrest should be included as an allowable force majeure event. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Changes 161 ■■ Recommendation 11-6: To encourage the pre-pricing of extra work and compensate the contractor for assuming the risk of performance, contract language should establish a separate, and higher, profit allowance for changed work done pursuant to a pre-agreed-on price than the markup allowed for time-and-materials (T&M) work. ■■ Recommendation 11-7: To facilitate agreement on contractor-owned equipment used for extra work, the contract should stipulate use of a published rate manual, such as those issued by EquipmentWatch or the U.S. Army Corps of Engineers, which establish methods for calculating reasonable equipment rates on specialized equipment. ■■ Recommendation 11-8: For extra work, the cost of small tools and supplies should be recognized as allowable by either including a stipulated percentage or establishing a percentage based on the actual direct cost of small tools and supplies as indicated in the contractor’s accounting system, and by applying this percentage to all labor costs allowed for the extra work. ■■ Recommendation 11-9: The contract documents, either through the use of bid items or the changes clause, should recognize the cost of extended overhead and allow additional compensation in the event that changed or extra work extends the contract duration. ■■ Recommendation 11-10: Markup provisions should provide separate percentage markups—one for overhead and another for profit—and should not require a credit for the overhead markup on deducted work. The prime contractor should be allowed a markup on subcontract changes. ■■ Recommendation 11-11: On design-build (DB) projects, the contract documents should define the basis for establishing allowable overhead rates for professional services. ■■ Recommendation 11-12: Contract provisions should be very clear as to the owner’s position on the contractor’s right to finish early and the entitlement to delay costs for the period before the contract-specified completion date. R E FE R E N C E S 48 CFR 15.404-4. Federal Acquisition Regulations System. Profit, (d). Profit-analysis factors. 48 CFR 52.236-2. Federal Acquisition Regulations System. Differing site conditions. EquipmentWatch. 2017. Residual Values Report. Atlanta, GA. https://equipmentwatch.com. FTA (Federal Transit Administration). 2016. Project and Construction Management Guidelines, updated March 2016. Washington, DC: U.S. Department of Transportation. Kauffman, M.W., and Holman, C.A. 1995. The Eichleay formula: A resilient means for recovering unabsorbed overhead. Pub. Cont. Law J. 24(2): 319–341. Shrestha, S.K. 2014. Average bid method: An alternative to low bid method in public sector construction procurement in Nepal. J. Inst. Eng. 10(1):125–129. Stolz, J. 2002. Proposed revisions to the differing site condition clause. In North American Tunneling: 2002 Proceedings. Edited by L. Ozdemir. Rotterdam, The Netherlands: A.A. Balkema. pp. 193–196. USACOE (U.S. Army Corps of Engineers). 2016. Construction Equipment Ownership and Operating Expense Schedule, Regions 1–12, vols. 1–12. EP 1110-1-8 (November). Washington, DC: USACOE. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 12 1 Dispute Resolution I N TR O D U C TION Disputes between owners and contractors arise frequently in construction, especially in the underground industry, where the risk of unanticipated or differing site conditions is ever present. Managers of successful construction projects fairly and efficiently resolve disputes, notably by maintaining open and frank communication. Conversely, adversarial and lengthy disputes are costly to all of the contracting parties. They severely degrade productive working relationships and consume time and money. Several trends and developments in the industry have increased the likelihood of contract disputes and claims in the past half century: ■■ The larger and more costly projects, and the resultant higher stakes, make for a greater likelihood of entrenched positions. ■■ The growth of urban areas and corresponding reduction in greenfield sites result in projects where ground conditions are less favorable, and surrounding infrastructure and utilities are more complicated. ■■ As more international firms are competing for major projects in the United States, there is less knowledge of local conditions and practices. ■■ The use of new, more sophisticated, and more expensive construction equipment and associated means and methods brings new risks, and it takes time and experience to develop mechanisms for avoiding and addressing these risks. ■■ Similarly, new risks arise with the use of alternative contract delivery methods, and lessons learned and solutions must sometimes be developed through disputes and claims. ■■ The competitive bidding climate motivates contractors to reduce contingency carried in their bid prices. To meet the challenge of potential disputes and claims, the underground construction industry continues to create contracting tools and incentives for the parties to minimize disputes and quickly and efficiently resolve issues as the work progresses. Owners continue to embrace alternative delivery methods such as design-build (DB) and construction Image © City of Los Angeles Department of Water and Power Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 163 164 Chapter 12 manager at risk (or sometimes, construction manager/general contractor [CMGC]) that allow the contractors more freedom to plan and manage a project and allocate risks to the parties most suited to manage those risks. Owners and contractors are approaching construction projects and managing the issues and risks that occur in a more collaborative manner, with heightened focus on communications, relationships, and mutual success. In addition, although most contracts are still awarded based on low bid price (see Chapter 10), there has been an increase in the number of contracts awarded on the basis of qualifications and best value. As discussed in Chapter 11, best value procurement and two-phased selection that considers bidder qualifications prior to price are both models that support more collaborative relationships and have the ability to reduce disputes and resultant claims. Best value procurements identify and weigh those aspects of the project most important to the owner; and they often provide opportunities for the contractor or DB team to negotiate the construction alternatives, price, and terms and conditions (see Chapter 10). The effort to identify and clearly assign project risks during contract formation can be a significant factor in avoiding contract changes and disputes. More communication among the parties can establish common understanding of the project’s goals and values. Contracts may include incentive provisions or agreements to share cost savings among the owner, contractor, and designer. Building relationships and clear expectations can help to avoid disputes later in the project. Despite all this progress, disputes continue to be a significant threat for underground projects. The threat of disputes has resulted in the development of many additional tools to help avoid disputes and to manage and resolve disputes when they do arise. Before Better Contracting for Underground Construction was published in 1974 (USNCTT 1974), the only recognized means to resolve disputes was litigation. Now, multiple tools are available to reduce the likelihood and severity of disputes and to manage their escalation. Often, contracting parties have many methods to choose from to resolve disputes that escalate to a point where formal intervention is required. These tools continue to evolve as the parties embrace alternative delivery methods that redefine the allocation of primary and secondary risk factors embedded in the contract provisions. This chapter describes some of the available tools and resolution methods, and their benefits and limitations. The methods discussed herein are not unique to the underground industry but are included in this book because the underground industry is one of the most dispute-prone sectors, and a thorough understanding of the methods used is essential for project and executive management personnel. The scope of this chapter is limited to disputes related to contract work; issues pertaining to bid protests and complaints or suits by agencies or groups that are not a party to the construction contract are not included. D I S P U TE M A N A GEM ENT AND AV OI D ANCE T OOLS Two of the most common tools used to help avoid disputes or to prevent them from escalating are partnering and the use of escrow bid documents. Partnering As discussed in Chapter 1, the successful completion of a construction project is more likely to occur when a respectful and cooperative relationship exists among the parties. Partnering is one way to encourage respect. While the contract establishes the legal relationships, the Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Dispute Resolution 165 partnering process attempts to establish working relationships among the parties. In 1991, the Construction Industry Institute published In Search of Partnering Excellence to promote partnering. This study used the following definition for partnering: … a long-term commitment between two or more organizations for the purpose of achieving specific business objectives by maximizing the effectiveness of each participant’s resources. This requires changing traditional relationships to a shared culture without regard to organizational boundaries. The relationship is based on trust, dedication to common goals, and an understanding of each other’s individual expectations and values. Expected benefits include improved efficiency and cost-effectiveness, increased opportunity for innovation, and the continuous improvement of quality products and services. Several elements are included in an effective partnering program: ■■ Participation in the process involves executive-level representatives of the owner (including representatives of the owner’s construction management consultant), contractor, major subcontractors, and key third-party stakeholders—particularly individuals who will be making decisions about disputes. ■■ Continued adherence to the partnering agreement and goals is necessary, especially given the long time frame (e.g., multiple years, especially for underground contracts). It is wise to include in the partnering agreements the requirement for monthly evaluations of the contractor by the owner and vice versa and regular meetings involving top owner and contractor personnel. ■■ Continued participation by the designer is required. ■■ Including project risk managers and representatives from all sides of the project team in technical problem-solving discussions address and mitigate identified project risks. The contractual option to establish partnering agreements has become standard on many large heavy civil and underground construction projects. For all the stakeholders of an underground project, partnering is a high-leveraged effort. It may require increased staff and management time up front, but the benefits are a more harmonious, less confrontational process, and the completion of a successful project without the need for further dispute resolution. Still, the execution of a successful partnering arrangement, with its great potential benefits, should not be considered a guarantee of respectful relationships and good communication. Partnering requires that all stakeholders buy into the concept and the central elements of the process throughout the time span of the contract, as discussed in Chapter 1. The execution of a successful partnering arrangement, with its great potential benefits, should not be considered a guarantee of respectful relationships and good communication. Partnering requires that all stakeholders buy into the concept and the central elements of the process throughout the time span of the contract. One of the keys to successful partnering is selecting the right facilitator for both parties. The optimal facilitator is someone who is known and respected by both parties and has direct experience in management of heavy civil construction contracts. Furthermore, the facilitator clearly understands the fundamentals of the partnering process and is effective in Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 166 Chapter 12 assisting key project staff in developing an effective partnering process for all the goals and objectives defined. The facilitator is not the leader of the partnering effort; rather the goal is for key project staff for both parties to step up and serve as project leaders. Because relationships are so critical to dispute avoidance and effective resolution, executive partnering should be a part of every underground project. Escrow Bid Documents Many public agencies include a contract provision requiring the contractor or design-builder, on award of the contract, to submit the backup documents used in bid preparation shortly after bid opening or notification of intent to award to the successful bidder. The documents are kept in escrow to be used to resolve disputes about changes. It is not the intention of this provision to require the bidder to perform unreasonable efforts during the preparation of the proposal, but to ensure that the escrow bid documents will be adequate to enable complete understanding and proper interpretation of their intended use. The primary benefit is their usefulness in resolving disputes that arise during construction, mostly when contractors make change-order requests for differing site conditions or extra work, or owners issue credit requests for deleted work. To an extent, both types of disputes depend for their validity on differences between the contractor’s bidding assumptions and the actual quantities and costs. The availability of escrow bid documents can verify the fairness and reasonableness of any proposed adjustment in the contract price or contract time. The escrow documentation can resolve debates about what is included and the prebid assumptions regarding cost and can eliminate the mistrust that may develop otherwise. To optimize the benefits of these documents, it is important that the bidder clearly identify the estimated costs of each bid item contained in the bid schedule. Estimated costs should be itemized into the bidder’s usual estimate categories such as direct labor, repair labor, equipment operation, equipment ownership, expendable materials, permanent materials, and subcontract cost, as appropriate. The bidder’s allocation of plant and equipment, indirect costs, contingencies, markup, and other items to each bid item should also be included. Moreover, it is important that the owner clearly specify the content of the bid documents that must be made available and placed into escrow. This documentation should include the following: ■■ Anticipated, detailed project schedule at the time of the bid ■■ Proposals/quotations from subcontractors and suppliers with all backup documentation including the conditions and pricing ■■ Quantity takeoff documents including calculations ■■ Labor rates ■■ Equipment rates ■■ Equipment proposals/quotations including conditions and pricing ■■ Assumptions or details used to develop the production rates assumed in the estimate and project schedule ■■ All survey notes and calculations, site visit notes or documents, and any notes from prebid meeting(s) ■■ Takeoff sheets, cut and add sheets ■■ A reference to all manuals, books, and/or reference guides used in determining the bid Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Dispute Resolution 167 Some argue, however, that the escrow bid documents are irrelevant in the resolution of disputes, and that the proper consideration is not what the low bidder included but what a prudent bidder would have included, given the contract documents. Escrow bid documents do not prove that the bidder’s assumptions were reasonable, only that the low bidder relied on them in preparing the bid. The argument can be made that the owner should not rely on the contractor’s method of cost allocation in the bid documents to determine the value of changed or extra work. Escrow bid documents can be used on almost any type of construction project to help decrease the number and intensity of disputes. If a dispute review board (DRB) or mediator is used to resolve the quantum portion of disputed claims, the board members or the mediator may be provided use of and access to the documents for purposes of evaluating, understanding, and reaching a recommendation on disputes/claims. D I S P U TE R E SOL U TI ON M ETH OD S Once a dispute is escalated to the level of requiring formal intervention, various dispute resolution methods can be used by the parties as provided by the contract. Some states (e.g., California) have statutes that provide mechanisms in certain cases that apply to dispute resolution (see Cal. PCC 2017). With the exception of litigation, all of the dispute resolution methods discussed herein are collectively referred to as alternative dispute resolution (ADR) procedures, because they are alternatives to litigation. It is preferable for disputes to be resolved at the lowest possible level. When it is necessary to escalate disputes, escalation should be according to a disputes ladder, sometimes referred to as an issue resolution ladder. Issue resolution ladders are a stepped process that formalizes the negotiation between the parties of a construction project. The intent of the ladder is to provide a process that elevates issues up the chain of command between the parties involved within prescribed timelines. For example, a dispute might first be taken to the superintendent and the inspector at the field level. If they could not resolve the dispute, it would be escalated to the project level for the resident engineer and the project manager to resolve. If it could not be resolved at that level, the dispute could move to the executive level. The final step would be arbitration or litigation, with an outside party facilitating resolution. Disputes ladders are typically established in a partnering meeting early in the project. Dispute Review Boards DRBs are an efficient way to avoid or resolve disputes on construction projects as they arise. The primary goal of DRBs is to avoid more expensive methods of dispute resolution. A DRB is a panel of three respected and impartial professionals experienced in construction who assist in avoiding and resolving disputes. In most instances, the DRB provisions are incorporated into the contract change-order/claim/dispute resolution mechanism prior to bidding or receipt of proposals. The DRB hearing process should be inserted into the dispute resolution ladder between the contractor’s request for an equitable adjustment and the owner’s final decision. To implement a DRB, the board members are commonly selected and approved by both the owner and contractor soon after award of the contract. The DRB is officially established when the parties and board members execute a three-party agreement. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 168 Chapter 12 Selection of the board members is critical, and the owner and contractor should meet and discuss the qualifications of all prospective board members and jointly select them. The parties should select members that have been trained by the Dispute Resolution Board Foundation (DRBF), understand and follow the DRBF’s practices and procedures, and adhere to the DRBF’s code of ethical conduct. The parties to the dispute may select the chair, or delegate that responsibility to the selected members themselves. The advantage of this selection method is the elimination of any notion of allegiance to a party nominating a prospective board member. The goal is to establish a DRB that the parties will mutually respect and trust, as confidence in the DRB’s ability and impartiality often determines whether both parties will accept its recommendations. Board members become familiar with the project before any disputes arise. After being selected, board members review the project documents to learn the scope and terms of the construction contract. It is important that the first DRB meeting be held promptly, and not wait until the first dispute has arisen. During the first meeting, the parties and board members discuss the DRB process and the operating procedures that will be followed during prosecution of the work. The operating procedures constitute an informal agreement between the parties and the DRB. The major purpose is to inform the parties of the DRB’s plan for implementing a DRB process that is consistent with contract documents. The operating procedures are subject to change by agreement among the parties whenever necessary to facilitate optimum application of the DRB process. The operating procedures outline the specifics as to (1) periodic meetings and their agendas, (2) procedures for advisory opinions, and (3) procedures for dispute hearings. These procedures can be tailored to the parties’ preferences. Following the first meeting, the board members receive periodic progress reports, attend quarterly project meetings, and make quarterly site visits. When a dispute arises, either the owner or the contractor can ask for advisory opinions or a formal hearing in accordance with the operating procedures that have been accepted by the parties and the DRB. Use of the advisory opinion procedures may expedite the settlement process and is certainly less costly and less time consuming than a DRB hearing. The DRB’s preliminary view on the issue forms a basis for the parties to negotiate a settlement without further assistance from the DRB. If the issue is not resolved and a DRB hearing is held, no reference to the advisory opinion is allowed. All positions, evidence, and other relevant data are resubmitted at the hearing. The parties are not bound by their earlier presentations at the advisory opinion meeting, and the DRB is not bound by its advisory opinion. If the parties mutually agree on a formal hearing, each side explains its position and presents supporting evidence during the hearing. The DRB listens to the presentation of the facts and asks questions to clarify the relevant issues, then deliberates and prepares a recommendation for resolving the dispute. The DRB’s recommendation is not usually binding, so the owner and the contractor must each respond with either an acceptance or a rejection. Experience has shown that when owners and contractors trust and respect the board members, they are very likely to either accept the DRB’s recommendations or use them as a basis for negotiation rather than pursue litigation. The question of whether the DRB’s recommendation is binding should be dealt with in the contract documents. Worldwide use of the DRB process is reportedly growing at a rate of 15% per year, and several organizations have produced model DRB provisions that can be used by contracting parties. The American Society of Civil Engineers through its Underground Technology Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Dispute Resolution 169 Research Council pioneered DRB provisions in its 1989 guide (UTRC 1989) and issued revised documents in its 1991 guide (UTRC 1991). Some of the same individuals involved in developing the American Society of Civil Engineers (ASCE) guides published a further revision called the Construction Dispute Review Board Manual (Matyas et al. 1996). In 2007, the DRBF published a set of model provisions (2007). Several other groups, including the International Chamber of Commerce, the World Bank, and the American Arbitration Association (AAA), have produced their own model DRB provisions. Each of the provisions are unique, often differing on the important issue of how board members are selected. The DRB process provides many benefits to all participants on the construction project. The history of the use of DRBs in the underground construction industry demonstrates that the process facilitates positive relations, open communications, and the trust and cooperation that is necessary for parties to resolve the contractual issues amicably. Other benefits of the DRB process include the following: ■■ The process encourages the parties to settle claims and disputes in a prompt, businesslike manner. ■■ DRBs convene contemporaneously with or soon after the events that lead to a dispute. This aids resolution because it is easier to determine the facts that gave rise to the dispute. ■■ DRBs are able to recommend solutions that are not available after a project is complete. Other dispute resolution systems can only determine what monetary damages a party is entitled to receive. DRBs, however, can recommend alternative measures to mitigate or eliminate problems in time for the parties to actually take corrective action. ■■ DRBs tend to resolve disputes more quickly than other types of dispute resolution. When an owner or contractor decides to submit a dispute, the DRB promptly conducts a hearing and renders a decision relatively quickly. This can prevent hostility from building up while solutions are being resolved. ■■ The board members usually understand a dispute more thoroughly than do other types of adjudicators. The parties can usually present more detailed and technical evidence to a DRB because the board members already know most of the background information and are experts in construction. Because they have been involved with the project from the beginning, board members can put the disagreement in the context of its history and the rest of the project. ■■ In the DRB proceedings, the parties are less constrained by procedural or evidentiary rules, allowing the board members a better opportunity to get a full understanding of the underlying facts. There will sometimes be a dispute regarding whether DRB recommendations are to be admitted into evidence in subsequent arbitration or litigation. One can argue that by allowing the ultimate trier of fact to consider the DRB recommendation, the parties will be more inclined to accept the DRB’s recommendations, instead of just using the DRB as a mock jury and to obtain free discovery. Moreover, the opinion of three well-respected experts with firsthand knowledge of the dispute is powerful evidence in future proceedings. However, arguments against admissibility include an expectation that the parties will be less likely to use the DRB because of the fear that an unfavorable recommendation will be used against them, and because admissibility may focus the parties’ attention on building a case Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 170 Chapter 12 for subsequent proceedings instead of reaching an agreement. Accordingly, it is best to cover in the contract documents the issue of admitting a DRB recommendation into evidence in a subsequent proceeding, rather than waiting to address it later in the process. DRB recommendations are not usually binding, and the parties are free to reject the recommendations and seek another forum for resolving the dispute. In this respect, DRBs are similar to mediation. As in mediation, disputants often feel empowered because a binding judgment is not imposed on them by others. However, unlike traditional mediation, DRBs usually provide written recommendations, which provide concrete guidance for settling the dispute and make the DRB’s decision very persuasive. The general conditions of the contract usually define the administrative procedure for dispute resolution, as well as which disputes may be referred to the DRB. As noted, the DRB should not hear every minor problem on a job. One way to define which disputes may be advanced to the DRB is for the owner to determine whether it wants the contractor to submit a complete claim (including quantum) and have the engineer evaluate this claim before an issue can be referred to the DRB. The advantage of this approach is that matters are likely to be brought to the DRB only when the owner has had an opportunity to fully evaluate the issue based on the information provided by the contractor. Another advantage is that the contractor cannot reserve its calculation of quantum to see where the DRB will provide entitlement and then calculate damages on that basis to its own benefit. Because one of the advantages of DRBs is that disputes can be resolved in a timely manner, requirements for submittal and evaluation of a complete claims package, including quantum, may hamper timely resolution. In addition, during the negotiation of quantum, the parties can often benefit from a DRB ruling on a specific issue (e.g., definition of small tools or specific overhead elements covered by the contract markups) in order to speed up the negotiations. The most important reason for early resolution is to determine appropriate time extensions soon enough to permit the contractor to revise the schedule and the work plan to take advantage of the time extension. Perhaps the most important reason for early resolution is to determine appropriate time extensions soon enough to permit the contractor to revise the schedule and the work plan to take advantage of the time extension. If dispute resolutions on time-related issues are deferred to later in the job, the time extension serves only to alleviate liquidated damages and is not helpful for managing the project in an efficient manner. One of the disadvantages of DRBs has been a tendency to delay the dispute hearing until late in the claims process, effectively transforming the DRB from a dispute review board to a claims review board. This is not good practice because the DRB recommendation is not as timely as it could be, allowing the parties to become entrenched in their positions and thus less likely to reach agreement. The longer such disputes fester, the more likely it is that they can adversely affect the ongoing relationship between the parties. Mediation Mediation is a common form of ADR that involves the engagement of a neutral third party to facilitate a settlement. As with other methods of dispute resolution, the primary goal of mediation is to resolve disputes quickly and economically. Parties are especially likely to Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Dispute Resolution 171 turn to mediation when they wish to have a confidential process and resolution. The parties agree on a mediator who tries to identify and help resolve the disagreement between the parties. By meeting privately with each party, mediators are sometimes able to help craft solutions that the parties would not have found through direct negotiation. The mediator can propose settlement terms and encourage settlement, but the parties remain in control and are free to reject a mediator’s suggestions and proceed with other dispute resolution methods, including litigation. Unless the parties agree otherwise, a mediator has no ability or authority to make decisions, render opinions, or bind the parties. Like partnering, mediation may be used by the parties at any time they determine would be valuable during a dispute: prior to, during, or after other dispute resolution processes such as DRB, arbitration, or litigation. However, mediation is typically conducted after construction ends, which can allow solutions that would not be available if work were still ongoing. It may be agreed by the parties that all communications at a mediation will be completely confidential and not admissible in subsequent arbitration or court proceedings. The mediator is usually an outside party, with training in mediation skills and with some expertise or experience in the subject matter of the dispute. The parties to a dispute can request a mediator from a referring organization such as the AAA, or they can agree on an individual they feel is capable of facilitating the negotiations. Local professional associations and private mediation firms are often good sources for competent and experienced mediators. Mediators are often attorneys or judges experienced in litigation. The mediator’s role involves gathering the facts of the dispute from each perspective and facilitating negotiations by cultivating understanding between the parties. A good mediator may act alternately as a communication channel, an impartial confidante, a tension breaker, and a voice of reality. Mediation usually follows a three-stage process. First, the mediator meets with both parties simultaneously with or without legal representation, and each party provides its statement of the relevant facts that support that party’s position. The mediator may request written submission of background information, positions, and key documents prior to the initial meeting. The mediator uses the initial joint session to gain an understanding of each party’s position and allegations. Second, the mediator meets privately with each party to present settlement offers from the opposing side and to discuss possible counteroffers. This series of back and forth “shuttle diplomacy” by the mediator is a critical stage of mediation in which the mediator may privately question the party and present suggestions that may satisfy the party’s needs in a manner that had not been pursued previously. A mediator’s efforts are vital to facilitate each party’s willingness to negotiate and obtain an agreement between them. Finally, if the parties reach an agreement, the mediator brings them back together to confirm and finalize the terms of their settlement. Parties to a dispute may chose mediation because it protects their privacy better than other alternatives. Unlike litigation, which creates a public record of the entire proceeding, mediation is a private process that is completely controlled by the parties themselves. All discussions with the mediator are confidential, both during the mediation and in any further proceedings after the mediation. The AAA’s Construction Industry Arbitration Rules and Mediation Procedures (2015) forbids mediators from divulging confidential information and shields them from having to testify in subsequent ADRs or litigation. Most mediation agreements place similar restrictions on the parties themselves, which prevents any information obtained during the mediation from being used in later legal proceedings. States have Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 172 Chapter 12 even enacted statutory provisions to ensure the confidentiality and nondiscoverability of mediation proceedings. Because mediation generally does not require document discovery, it is easier for the parties to prevent their opponents from obtaining revealing documents or information. One advantage of mediation is its relatively low cost and shorter duration. Typically, it is less expensive than arbitration or litigation because the process is less time consuming, more informal, and requires less preparation and involvement by the attorneys for each side. Mediations rarely require extensive and costly discovery activities. Sometimes parties are comfortable engaging in the process without attorneys. The primary expense in mediation is the mediator’s fee, which is often shared equally between the parties. This daily fee can be comparable to an arbitrator’s daily fee. Mediation may require more than one meeting to resolve the issue(s). The primary goal is to resolve the issue and not to reach an independent determination after a hearing. As such, mediations generally do not last as long as arbitrations. Other costs of mediation include the parties’ time and attorney fees for preparation and representation at the mediation. Another advantage is that when mediation is successful, disputes are usually resolved more quickly than through litigation or arbitration. Mediation usually requires less preparation time and involves shorter delays and fewer formal proceedings than traditional adjudication. It is difficult to compare the time required by mediation with the time it takes a DRB to resolve a dispute because they occur during different time frames—mediation is typically conducted after construction ends, whereas DRBs meet and deliberate concurrently with construction. Mediation is usually the least expensive method of resolving relatively simple and independent claims. It is also praised by some proponents for its flexibility and problem-solving capabilities (Sander 1990), particularly when compared to the adversarial, winner-take-all nature of litigation. Because the parties have complete control over the negotiations and the ultimate settlement, they are sometimes able to find tailored solutions that would be unlikely in a decision by a judge, arbitrator, or DRB. Flexibility and control, however, lead some legal experts to conclude that mediation does not provide adequate protection for parties that have unequal power (Delgado et al. 1985). A mediator’s assessment can encourage settlement by giving the parties an indication of how a court might view the case. However, if one party strongly disagrees with the mediator’s interpretation of the case and feels that a judge would rule differently, that party might believe that mediation weakened its position in upcoming settlement negotiations. If a settlement is not achieved, the parties can always begin another type of dispute resolution process and may return to mediation at other stages of a dispute. Mediation may be required by the courts or by the contract prior to utilizing another dispute resolution process. When the dispute hinges on an unsettled legal issue, when one party is not willing to cooperate in the give-and-take process, when more than two parties are involved in the dispute, or when one party has considerably more power than another, the parties may be less likely to find resolution through mediation. However, even when negotiations have failed and parties are in adversarial mode, the creativity and realistic assistance of a skilled mediator may bring new light to the greater situation and may lead to an unexpected agreement by the parties to resolve the matter. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Dispute Resolution 173 Arbitration Arbitration is a form of ADR that is more similar to traditional litigation than are other ADR forms and is often included in contract provisions in place of adjudication in the courts. State and federal laws allow the contract parties to agree by contract to choose arbitration as the sole and final resolution of disputes. In arbitration, both sides present their case to a neutral arbitrator or panel of arbitrators, which then makes a decision. The arbitrator’s ruling is binding on both parties and may not be appealed. An arbitrator’s decision may be challenged in a court of law in only the most extreme circumstances and will receive deference from the courts because the parties chose this form of dispute resolution in place of litigation in the judicial system. However, because the arbitrator is not usually a judge and not necessarily even a lawyer, the rules of procedure and evidence are typically less formal and more flexible than in litigation. In arbitration, there is a constant tension between providing each party a full and fair hearing and promoting a system that is efficient and economical. An agreement to arbitrate should include the rules that the parties will follow when arbitrating a dispute. Although many construction contracts require the use of the AAA’s arbitrators and arbitration rules for the construction industry, owner agencies can write their own rules and include them in the contract. Alternatively, the parties can jointly write their own rules. One of the most important considerations is how the arbitrator or arbitrators will be chosen. When the agreement makes the AAA rules applicable, the AAA provides a list of qualified arbitrators who have experience in the industry or with a particular type of dispute. Contracting parties and experts sometimes prefer arbitration to litigation because of the perceived savings in time and money. This may have been true in the past, but today, time and money comparisons do not clearly favor arbitration, which may be partly because of the high stakes involved in large, expensive heavy civil underground projects. Arbitration, like litigation, is a win-or-lose proposition. Arbitrators are not required to follow the law or legal precedent, but pledge to provide an independent and objective determination based on the information presented by each party, and overturning an arbitrator’s award through an appeal to the courts may be even more difficult than winning an appeal of a judicial decision. As a result, disputants often feel pressure to spend whatever is necessary to win. Arbitrations have gradually become more formal and more expensive as a result. Arbitration is not necessarily faster than litigation, because of scheduling conflicts and because the process still requires hearings to present witnesses and evidence. Scheduling hearings with the arbitrator(s), the parties, the parties’ lawyers, and witnesses can require months, particularly because large, complex cases can require multiple arbitrators and multiple days of hearings. The hearings themselves can sometimes take more time than a trial because of the informal rules of evidence. Arbitrators tend to consider evidence that would not be admissible in court, resulting in more evidence being presented and thus longer hearings. However, arbitration is still less formal than litigation and may save time and money. In arbitration, unless the parties agree to participate in formal discovery, they may be limited during the hearing to inspecting documents and questioning witnesses. Also, costly appeals are less likely because of the limited review provided by the courts. These differences can Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 174 Chapter 12 save attorneys’ fees and other expenses. Just as with litigation of construction disputes, the relative cost and time associated with arbitration vary significantly on a case-by-case basis. One of the biggest differences between arbitration and litigation is that parties can pick their own adjudicator in arbitration. This can be beneficial to both parties to a construction dispute because they can select an arbitrator who is experienced in construction practices and technical subjects related to specific issues in dispute. Arbitrators are bound to be neutral and unbiased, but are not bound by legal precedent and legal doctrines that courts are obliged to apply. Ideally, arbitrators can use this freedom to make decisions that are based on the unique facts of each situation and, therefore, are as fair as possible, but this freedom also reduces the predictability of decisions. Courts are bound to follow precedent, which theoretically results in more consistent, predictable rulings. Some disputants prefer the process of arbitration because it provides them with more privacy than litigation in the courts before judges and juries. Court proceedings are usually open to the public, and the results of trials are publicly reported. In arbitration, the parties decide who can attend the hearings and whether the results will be made public. Sometimes, business entities fear that litigation would reveal company secrets to competitors and place them at an unfair disadvantage in the market. The relative privacy of arbitration is a clear advantage over litigation for some parties. Before beginning arbitration, disputants should review the types of remedies they will be seeking and determine whether an arbitrator would have the authority to provide the relief being sought. If certain equitable relief such as restraining orders or mechanics liens are required, litigation might be the only possible way to obtain the remedy. As stated previously, an arbitrator’s ruling is binding on the parties, regardless of whether they assent to it. The ruling is usually subject to review by the courts for one of the following reasons: procedural infirmities, such as manifest bias; refusal to consider relevant evidence; an undisclosed relationship between an arbitrator and a party, a party’s attorney, or a witness; an abuse of discretion; or some other extreme circumstance. These requirements are more stringent than the standards applied by courts when deciding whether to hear an appeal of a lower court’s decision. Although this feature of arbitration may save the cost and time of appeals, it can also seem unfair when an arbitrator ignores a legal rule or overlooks a material fact. Arbitration is a final resolution of a dispute that replaces litigation. This is unlike DRBs, mediation, or partnering agreements, which leave open the possibility of subsequent litigation. Litigation Most owners, contractors, and designers are familiar with litigation. When other methods of dispute resolution fail to settle a disagreement, either party can file a complaint with an appropriate court, although some contract provisions govern when such complaints may be filed. The procedures in litigation are governed by statute in each jurisdiction. In construction cases, plaintiffs typically allege that the defendant owes them money for breaching their contract by not paying for the work performed or by not performing the work required by the contract. Plaintiffs typically seek monetary damages, interest, the costs of pursuing the claim, or equitable relief such as injunctions or temporary restraining orders. Some major phases or events in a civil lawsuit are pleadings, discovery, motions for summary judgment, trials, and appellate proceedings, all of which are detailed next. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Dispute Resolution 175 Pleadings. Typically, pleadings include a complaint and an answer. In the complaint, a plaintiff must show a cause of action—a set of facts that entitle the plaintiff to judicial relief. The complaint need only contain a brief and simple statement of the allegations that set forth the cause of action. In an answer, a defendant must admit or deny each allegation of the plaintiff’s complaint. An answer can also include affirmative defenses to the claims in the complaint and counterclaims against the plaintiff. The defendant may also choose to bring a third party into the suit, making that party liable to the defendant if the defendant is held liable to the plaintiff. This is called third-party practice. When the answer includes counterclaims against the plaintiff, the plaintiff must file an answer to the counterclaim admitting or denying each allegation of the counterclaim. Discovery. The discovery process gives all parties an opportunity to obtain facts from one another and from nonparty witnesses. This can involve producing and inspecting documents, conducting depositions, serving and answering interrogatories, making site visits, and exchanging other types of relevant information.* In a deposition, lawyers ask a witness a series of questions while the witness is under oath. This testimony is a critical element of discovery and frequently provides the basis for an out-of-court settlement by allowing parties to assess the knowledge, credibility, and persuasiveness of potential witnesses. Typically, any document or information that is relevant to the claim or defense of any party and is not privileged must be produced during discovery. The most common privileged information is that protected by attorney–client privilege. Motion for summary judgment. After discovery, if a party believes that there is no genuine dispute of material fact—that is, a fact that must be proven in order for a party to prevail on a claim or defense—it may bring a motion for summary judgment. It is not uncommon for both parties to move for summary judgment. The standard for a genuine dispute is whether a reasonable jury could determine the factual dispute in favor of either party. If, in the judge’s opinion, there can be “but one reasonable conclusion,” the factual question does not need to be submitted to the jury (Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 [1986]). If there are no genuine disputes of material facts, then the judge can answer any issues of law and the case is decided. If the resolution of the case favors a party that moved for summary judgment, the judge will grant the motion and render summary judgment for that party. Trial. In the most well-known phase of a civil case, each party must attempt to prove its claims and defenses by presenting evidence and witnesses. The party asserting a claim or defense usually has the burden of proof for that claim or defense and must prove each element of the claim or defense to a more-probable-than-not standard. The trial officially starts with attorneys from both sides making opening statements that summarize what they will attempt to prove in the trial. After the opening statements, the plaintiff’s witnesses take the stand, followed by the defendant’s witnesses. Each witness answers questions from the proponent’s attorney (direct examination), from the adversary’s attorney (cross-examination), and once again from the proponent’s attorney (redirect examination). Next, the attorneys make closing arguments that summarize their cases. The attorneys state what they have proved and what inferences can be drawn from such proof. * Interrogatories are written questions formulated by one party and served on the other to be answered under oath for determining the legal position of the parties and gathering information. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 176 Chapter 12 At the end of the trial, the decision-maker—a jury or judge—renders a decision on each claim presented during the trial. In a jury trial, after the closing arguments, the judge charges the jury by telling them which rules of law to apply based on how the jury finds the facts. The judge knows the appropriate law, but the jury is the sole finder of facts. When each party waives its right to a jury trial or when the claims presented do not include a right to a jury trial, the judge decides all questions of fact and law. A nonjury case, where the judge renders the verdict, is called a bench trial. In most construction disputes, the parties involved have the right to a jury trial. Determining whether to demand a jury is usually a strategic decision for each party. During a jury trial, the judge can render a judgment after one side has been fully heard on an issue or even after the jury has returned its verdict. A judge can only grant this type of motion when “there is no legally sufficient evidentiary basis for a reasonable jury to find for [the opposing party] on that issue” (Fed. R. Civ. P. 2018). In federal court this is called a judgment as a matter of law. In some state courts, such as New York, it is called a directed verdict when rendered before the jury retires to deliberate and a judgment N.O.V. (judgment non obstante veredicto or judgment notwithstanding the verdict) when rendered after the jury retires. Appellate proceedings. After the trial court has rendered its final decision in a case, either party can appeal the decision to an appellate court. Usually, a new jury will not be ordered. Instead, the appellate court applies the correct legal standard based on the facts as the trial judge or jury found them. The appellant must identify specific rulings of the trial judge that it feels were erroneous and that impacted the outcome of the case. Sometimes the losing party appeals the verdict of the trial court and the prevailing party cross appeals the amount of the award it received. Although litigants can appeal a trial court’s ruling at least once as an appeal of right, the highest courts in most jurisdictions only accept appeals on a discretionary basis. Litigation is often the best method for resolving multiparty disputes, which can occur frequently in construction projects. Usually, when several parties are involved in directing, performing, and approving the work, disputes arise concerning who is at fault or the relative degree of fault among the parties. When a problem occurs during construction, it is unusual to have only one possible cause of the problem. For example, when an owner sues a general contractor for the cost of repairing nonconforming work, the general contractor might feel that the designer should be liable because the plans were not clear or that a subcontractor who performed part of the work actually caused the problem. In arbitration, the prime contractor would probably not be able to include those parties in resolving the dispute with the owner. Rather, the contractor would have to begin a separate arbitration or file a lawsuit to seek indemnification from the designer or the subcontractor. This situation can sometimes result in inconsistent findings between the different proceedings. In litigation, the contractor would almost always have the right to join the additional parties, and the dispute could be resolved among all parties involved. Another advantage of litigation is the possibility of disposing of the case without even starting a trial. If the complaint does not properly allege a cause of action, contains jurisdictional errors, or has other major deficiencies, the judge can dismiss the case. A dismissal can be made without prejudice, where the plaintiff can correct the complaint and file it again or file it in another court; or with prejudice, where the plaintiff is barred from bringing other claims arising from the same facts. If there are no disputes about the facts of the case, the Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Dispute Resolution 177 judge can decide it on a motion for summary judgment. Although summary judgment is also available in arbitration, arbitrators are usually reluctant to deny a party its day in court. The extensive discovery procedures available to litigants are unmatched in most arbitration proceedings. In a concealed conditions case against a private owner, extensive pretrial discovery may be necessary to prove that the owner knew of the condition and intentionally failed to reveal it. In litigation, the contractor would be able to examine the owner’s records, request admissions from the owner, and question its employees to look for evidence of the owner’s knowledge. One concern about litigating construction cases is that judges and jurors typically have no prior knowledge about construction and might have trouble understanding the complexities of a construction claim. Even the structure of the relationships among owners, architects, sureties, construction managers, general contractors, and subcontractors is difficult to understand without having experience in the industry, as is the division of their responsibilities. In addition, some cases, such as design failure cases, involve technical terms and concepts that most jurors and even judges will not thoroughly understand. This can favor a party that is hoping the case will be decided on some other basis, but most parties typically prefer that the decision-maker be capable of thoroughly understanding the facts. This is usually possible in arbitration because the arbitrator is often an expert in construction and related fields. Parties with complex and technical cases should consider this characteristic of litigation. In the U.S. court system, justice is emphasized more than efficiency. In summary, in the U.S. court system, justice is emphasized more than efficiency. As a result, litigation is notoriously costly and time consuming but provides many safeguards against erroneous rulings. If time and expense are larger concerns to a party’s opponent, it might be strategically wise to choose litigation over arbitration because of the longer and more expensive discovery and appeals processes of the courts. Litigation is highly preferable when several parties are involved or when the dispute strongly favors one side and could be resolved by a motion for summary judgment. Some cases hinge on questions that could be answered by evidence in the opposing party’s control. In such cases, the party trying to access the evidence would have a better chance through litigation than through any type of ADR. A case that involves complicated relationships or technical evidence, however, might be evaluated more accurately by an experienced arbitrator, because he or she would be more likely to understand the details of a construction dispute than would a judge or jury. C O N C LU S I O N S AND RECOM M END ATI ON S All parties associated with a construction project agree that disputes should be avoided. However, if disputes occur during the progress of the work, there are several means to mitigate and resolve them. The selected resolution method should be minimally time consuming and as inexpensive as practicable. Attention should also be given to causing little, if any, friction between project personnel and to achieving resolution in a professional and transparent manner. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 178 Chapter 12 The various methods of dispute resolution range from the least expensive option of a cooperative environment to litigation, which is generally the most costly and time consuming. The following recommendations can be made about dispute resolution. ■■ Recommendation 12-1: Executive-level partnering should be employed on all underground projects. ■■ Recommendation 12-2: Escrow bid documents should be used to help resolve disputes on underground projects, but use of such documents should be restricted to the resolution of quantum issues, after entitlement has been established by other means. ■■ Recommendation 12-3: A dispute review board (DRB) should be used in all underground construction contracts and should be structured so that the DRB hearing occurs before the owner’s final decision. RE FE R E N C E S AAA (American Arbitration Association). 2015. Construction Industry Arbitration Rules and Mediation Procedures. New York: AAA. Cal. PCC (California Public Contract Code). 2017. Section 20104. Sacramento: California Office of Administrative Law. Construction Industry Institute. 1991. In Search of Partnering Excellence. Special Publication 17-1. Austin: University of Texas. Delgado, R., Dunn C., Brown P., et al. 1985. Fairness and formality: Minimizing the risk of prejudice in alternative dispute resolution. Wis. Law. Rev. 1359. DRBF (Dispute Resolution Board Foundation). 2007. Appendix 2A: Guide specification and Appendix 2B: Three-party agreement. In Practices and Procedures Manual. Seattle, WA: DRBF. Fed. R. Civ. P. (Federal Rules of Civil Procedure). 2018. Title VI: Trials, Rule 50: Judgment as a matter of law in a jury trial; related motion for a new trial; conditional ruling. Washington, DC: U.S. Government Printing Office, Committee on the Judiciary. Matyas, R.M., Mathews, A.A., R.J. Smith, et al. 1996. Construction Dispute Review Board Manual. New York: McGraw-Hill. pp. 121–140. Sander, F. 1990. Dispute Resolution Within and Outside the Courts. Washington, DC: National Association of Attorneys General and American Bar Association. USNCTT (U.S. National Committee on Tunneling Technology). 1974. Better Contracting for Underground Construction. Washington, DC: National Academy of Sciences. UTRC (Underground Technology Research Council). 1989. Avoiding and Resolving Disputes in Underground Construction: Successful Practices and Guidelines. New York: American Society of Civil Engineers. pp. B8–B20. UTRC (Underground Technology Research Council). 1991. Avoiding and Resolving Disputes during Construction: Successful Practices and Guidelines. New York: American Society of Civil Engineers. pp. 45–60. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 13 1 Insurance I N TR O D U C TION Insurance plays a major role in the financing of risk inherent in any construction project. This is particularly true in underground construction. Work underground creates unique loss exposure, thus underground construction presents a unique set of hazards for many insurance products. Some of the hazards that must be evaluated include blasting, ground collapse, third-party exposure, confined space, emergency rescue, electrical hazards, ventilation, water intrusion, gases, silica, and earthquake and flood exposure. All underground projects should undergo a risk assessment by both the owner and the contractor to identify the associated risks and to decide on fair and equitable allocation of those risks. (Risk management is covered in Chapter 4.) The parties must then consider how risks are to be allocated and financed. This will logically lead to a discussion of insurable risk as well as the availability and cost of appropriate insurance products to meet the needs of the project and the project participants. This chapter focuses on several areas that owners, engineering firms, and contractors should consider when involved with underground construction. It begins with an overview of insurance concepts and relationships between agents, brokers, carriers, and reinsurers, and covers various insurance and surety products in the market. The discussion of the relationship between contractual responsibilities and insurance addresses indemnity provisions, subrogation, the use of deductibles and self-insured retention (SIR), and certificates of insurance. Insurance considerations for joint ventures and contracts using alternative delivery are also examined, as is the use of consolidated insurance programs (CIPs). O V E R V I E W OF I NSU RANCE CONCEPTS A ND R ELA T IONSHIP S INVOLVED As discussed throughout this book, it is impossible to completely avoid all risks on underground construction projects; however, insurance is one mechanism to help manage them. Insurance allows companies to transfer the risk of a large loss in return for smaller periodic payments, known as premiums. This transfer of risk is laid out in a legal contract called the insurance policy, which spells out the coverage, compensation, and other benefits. Image © Metropolitan Water Reclamation District of Greater Chicago Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 179 180 Chapter 13 Not all risks are insurable, and insurance may not be the most appropriate method for treating all risks. For example, insurance could be too expensive for certain risks (such as low-frequency, low-severity risks) or unavailable for others (such as high-frequency, high-severity risks). Additionally, insurance may be unable to fully compensate for a loss (e.g., property with great historical value, but little financial value). Theoretically, a company’s exposure to loss is infinite, so a careful analysis should be conducted on potential risks to determine the amount of risk the company wishes to transfer to an insurance company and the amount of risk it wishes to retain. For contractors, contract language will control the minimum limit requirements, but it is up to the individual firm to determine if those limits are sufficient, or if the firm will purchase additional limits. Several critical parties can help analyze the risks involved in a construction project and then facilitate the placement and maintenance of insurance programs. The principal insurance parties on a large construction project are brokers, agents, carriers, and reinsurers. Broker An insurance broker works on behalf of its clients (insureds) to obtain the most advantageous coverage, terms, conditions, and price. A true independent insurance broker is legally an agent of the insured and not of the insurance company. The broker specializes in insurance and risk management and essentially acts as a consultant to the insured. Because the broker represents the insured and not the insurance company, it cannot underwrite or bind coverage itself, but instead transacts insurance on behalf of the insured, charging commissions and/or fees for service. Brokers typically procure policy options from multiple insurance companies (marketing their insured’s business), which ensures competition for coverage terms, carrier services, and price. Standard brokerage services include the following: ■■ Understanding and analyzing the clients’ risks and making recommendations on how to properly insure them ■■ Marketing the client’s program to insurance carriers and securing competitive options ■■ Reviewing contractual insurance requirements for compliance ■■ Issuing certificates of insurance ■■ Providing loss control and claims advocacy services ■■ Conducting an ongoing analysis of the client’s program including coverage, limits, claims, and risk management practices ■■ Identifying overlaps and/or gaps in coverage between multiple insurance policies A broker should act as a consultative business partner, so it is important that insureds select one that has industry-specific expertise to support their unique risk profile. Agent An insurance agent is a representative of one or more insurance companies. Agents are compensated on the basis of commissions, and thus represent the insurer, not the insured. Carrier An insurance carrier, or insurance company, is the financial resource behind the coverage provided in an insurance policy. It is the issuer of the policy and the one that charges the Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Insurance 181 premium and pays for losses and claims covered under the policy. In return for charging a premium, the insurance company promises to pay the insured for certain financial losses due to various covered claims’ scenarios. Some insurance carriers also provide loss control services to help companies avoid claims. The distinct difference between a broker and an insurance carrier is that the insurance company bears the financial risk while the broker provides advice. Underwriters are employees of the insurance company and underwrite the risk, determining the pricing, terms, and conditions based on the risk profile of the insured. Reinsurance Carrier Reinsurance is insurance that is purchased by an insurance company from a reinsurer. Purchasing reinsurance allows insurance companies to remain solvent after major claims events, such as major disasters like hurricanes and wildfires. The company that purchases the reinsurance policy is called a ceding company or cedent under most arrangements. The reinsurance company issuing the reinsurance policy is referred to simply as the reinsurer. A company that purchases reinsurance pays a premium to the reinsurer, which in exchange pays a share of the claims incurred by the purchasing insurance company. The reinsurer may be either a specialist reinsurance company, which only undertakes reinsurance business, or another insurance company. Insurance companies that sell reinsurance refer to the business as assumed reinsurance. I N S U R A N C E AND SU RETY PROD U CTS FOR UNDER G R OUND C ONST R UC T ION Underground construction is risky business, so having a clear understanding of potential risks and how they will be insured is vitally important to the success of a project. In the event of a loss, insurance claim disputes can become contentious, costly, and disruptive to the project schedule, so each party and its insurance brokers need to clearly understand what insurance coverages will be in place, and who is contractually responsible for procuring them. It is important to remember that the exact coverage provided by an insurance policy can only be accurately assessed by reviewing the issued policy in detail and can vary widely depending on the form, carrier, and endorsements. The following principal categories of insurance coverage that should be considered on underground projects of all sizes are discussed in this chapter: ■■ Professional liability ■■ Commercial general liability, plus umbrella and excess coverage ■■ Contractors’ pollution liability and pollution legal liability (PLL) ■■ Workers’ compensation and employers’ liability ■■ Builder’s risk and equipment ■■ Other forms of liability (automobile, aviation, watercraft, railroad protective, and terrorism) ■■ Surety bonds (bid, performance, and payment) Underground construction is risky business, so having a clear understanding of potential risks and how they will be insured is vitally important to the success of a project. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 182 Chapter 13 Professional Liability Professional liability insurance protects a company’s business from claims alleged to have been caused because of the firm’s professional negligence. This includes claims for bodily injury, property damage, and economic losses as a result of a wrongful act or professional negligence. Because professional liability is specifically excluded from general liability policies, it is critical that design professionals and contractors purchase this separate policy to address the gap. Professional liability policies are designed to apply on a claims-made basis, meaning that a claim must be made and reported within the policy period and not exceeding a reasonable period after the policy period expires (called the extended reporting period, or ERP). These policies also list a specific date before the policy was put in place, often called a retro active date. Claims that arise out of acts committed prior to the retroactive date will not be covered, so the farther back the retroactive date, the more coverage provided. Another important characteristic of professional liability insurance is that it can cover contractual liability. However, there is a gap in coverage when the breach of contract does not rise to the level of professional negligence. Technical breaches, which in many cases can cause substantial harm, may not constitute professional negligence. For example, if a design firm fails to respond to a contractor’s request for information within the time required, there may be a breach, but not professional negligence. Typical professional liability policy exclusions include: express warranties or guarantees, contractual liabilities that are not tied to a professional standard of care, pollution claims (such as asbestos), intentional acts, and intellectual property claims. For design firms and contractors, professional liability is typically purchased on a practice program basis and renewed annually. Importantly, coverage is shared across all the company’s jobs, and defense costs erode the limits of liability, which should factor heavily into a company’s decision on what limits to purchase. Professional liability coverage is intended to cover the named insureds’ interests only and does not excuse subconsultants and subcontractors from procuring coverage for their own interests on an individual basis. The named insured may be contractually liable for the errors and omissions of its subconsultants and subcontractors. In such an event, it is important that the named insured require its subconsultants and subcontractors to maintain adequate coverage. On certain projects, the owner and design professional may decide to procure a project-specific professional liability (PSPL) policy, which provides a dedicated limit covering the entire design team, including subconsultants, under a single policy. A PSPL policy must be paid for and issued prior to construction but does not need to be renewed as it is written for a multiyear term that expires at the project’s completion, after which an ERP (sometimes referred to as a tail) applies. Historically, a PSPL policy was readily available from a wide variety of professional liability insurers. Unfortunately, because of a high volume of claims being made on these policies, often by project owners, insurers’ losses became so extreme that all but a few insurers stopped offering PSPL policies, and capacity is now very limited. Typically, the most cost-effective option to address concerns regarding adequacy of limits is to increase the design firm’s practice program limit, keeping in mind that the limit would need to be maintained for several years to comply with the contract, with maintenance cost being incurred each year. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Insurance 183 An alternative to the PSPL policy is a protective policy. Such policies have gained momentum as the pricing of project professional liability insurance has risen so steeply. They are offered to owners (owner’s protective) of construction projects, design-builders, and general contractors (contractor’s protective), and provide first-party indemnity for damages in excess of the design professional’s professional liability insurance that the named insured incurs as a result of the negligence of the design professional. The protective policy is in excess of the design professional’s professional liability insurance, and there is a minimum insurance requirement placed on the design professional by the insurer offering coverage. The underlying design professional’s professional liability policy must be exhausted before the protective policy will provide the indemnity. Regardless of professional liability program structure, selecting the proper limits of liability can be tricky. It is not the size of a construction project that determines the appropriate limits, but instead the overall risk profile. Factors that should be considered are ■■ Complexity of the project, ■■ Physical location and surrounding exposures, ■■ Length of project term and speed of schedule, ■■ State-of-the-art versus conventional construction, ■■ Potential financial impact of a loss, ■■ Overall construction value, ■■ Delivery method, and ■■ Statutory requirements and legal climate. Commercial General Liability, Umbrella, and Excess Coverage Although a professional liability policy covers negligent acts, errors, and omissions in performing professional services, a commercial general liability (CGL) policy covers nonprofessional activities. All construction contracts should require that all parties to the project carry CGL insurance. They should also specify the CGL industry forms permitted for the project, the minimum coverage amounts, the required endorsements, and the policy duration. Generally speaking, CGL policies cover an occurrence not subject to exclusion that causes an injury to a person or property. Unlike professional liability insurance coverage, CGL coverage is typically written on an occurrence basis. Thus, the policy in effect at the time of the incident or accident giving rise to the claim will provide the coverage, even if the claim is not made for several months (or even years) following the actual incident. CGL policies should include coverage for completed operations (i.e., if work on a completed project causes bodily injury or property damage years later) through the statute of repose. Most states have statutes of repose that are specific to construction projects, prohibiting claims beyond a specified number of years after the construction is completed. These statutes vary widely regarding the limitation periods, what is covered, and who the statute protects. The main purpose of CGL policies is to protect the contractor and owner in the event an accident on the jobsite causes property damage or personal injury to a third party. For example, if a contractor employee drops a piece of equipment, injuring a third party or the third party’s property, any claim against the contractor would be covered by their CGL policy. By adding the owner as an additional insured, coverage is extended to any claim by the third party against the owner as well. Typical exclusions under the CGL policy include Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 184 Chapter 13 injuries related to pollution (such as asbestos), war-related injuries, and injuries caused by a professionally negligent error or omission. Coverage for defense costs is almost always unlimited and in addition to the limits of liability. Standard CGL policies have $1,000,000 per occurrence, $2,000,000 aggregate limits of liability. For most projects, this level of liability limit would not be considered adequate. Thus, umbrella or excess liability policies are utilized to increase the overall liability limits, which will also apply to auto liability and employer’s liability. Umbrella policies can have broader forms than the primary liability policies, while an excess policy is usually no broader than the underlying primary policies. Excess policies are often called following form because they follow the coverage and exclusions in the primary policies. As with professional liability, there is no right answer for what liability limits are required from each party. Some generalizations can be made based on the size and complexity of a project, but each one should be carefully and individually assessed when determining the contractually required limits. See the preceding “Professional Liability” section for a list of important considerations. Contractors’ Pollution Liability and Pollution Legal Liability Contractors’ pollution liability (CPL) provides third-party coverage for bodily injury, property damage, or cleanup costs arising as a result of pollution conditions caused by the operations described in the policy. Pollution incidents are typically excluded under professional and general liability policies, so this policy is intended to fill in the gap. CPL can be written on either an occurrence or claims-made basis. Generally, occurrence coverage is preferred because the policy will respond to covered occurrences no matter when the claim arises, as long as the pollution event occurred during the policy period. This can happen when a gradual pollution event occurs during the course of construction and is not identified until after the policy expires. Claims-made coverage, conversely, may not cover claims that have not yet been made at the end of the policy period or any applicable ERP. Certain exclusions are common to most CPL policies. For example, expected or intended injuries, losses arising out of ownership or use of autos, known conditions, amounts payable under workers’ compensation laws, and punitive damages are routinely excluded. Other exclusions are much more policy-specific, such as exclusions for certain types of pollutants (e.g., asbestos, lead, and acid rain), certain types of property or damages, or certain types of claims. It is in the latter area that some real differences in coverage between policies are evident. Minor variations in wording can have significant coverage implications; therefore, individual forms must be closely analyzed to determine the exact scope of coverage and whether the coverage is adequate for the specific conditions of the project site. PLL is designed to cover claims arising from pollution releases at, on, or emanating from a specific scheduled location. Coverage can sometimes be added on as part of the CPL policy, but is most commonly purchased as a separate policy by the property owner. This policy is designed to cover those pollution incidents that emanate from the project site but are not caused by the actual contracting operations. Each location is individually underwritten to make a determination as to the extent of coverage that can be offered. Coverage can include first-party on-site cleanup, third-party bodily injury/property damage, and off-site cleanup for both new and preexisting conditions (no retroactive date). Additionally, policies can be tailored to fit very specific needs, such as limiting coverage to just on-site cleanup or off-site bodily injury. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Insurance 185 Workers’ Compensation and Employers’ Liability Workers’ compensation (WC) insurance is designed to be the exclusive remedy for an injured worker during his or her employment. Under the WC system in the United States, an employer must carry WC insurance but cannot be sued for damages by the injured employee. If the injured employee is compensated for on-the-job injuries, regardless of fault or negligence, the employee can collect only the statutory benefits and cannot sue for general damages (pain and suffering). In some states (e.g., New York), there are exceptions for “grave injuries,” which could subject an employer to liability for an injured employee outside the WC system. State legislatures determine the level of benefits injured workers receive, and when the legislature increases benefit levels, all policies pay the higher benefits. Employers’ liability (EL) covers employment-related claims that are not covered under WC or under CGL policies. Limits are typically $1,000,000 per accident for injuries, $1,000,000 per employee for disease, and $1,000,000 aggregate (annually) for disease. One type of claim is an employer’s liability to a spouse, child, parent, or sibling of an injured worker. Another type of claim is for bodily injury to an employee arising out of the course of employment and claimed against the employer in a capacity other than as an employer. This is called a dual-capacity claim, which is outside the scope of this chapter. Coverage for both WC and EL is excluded under general liability policies, and it is important that these coverages be required in all executed contracts to protect the interests of the parties and employees of a project. WC is also a statutory requirement in most jurisdictions. Builder’s Risk and Equipment On all construction projects, property coverage should be purchased and maintained to protect the work-in-progress. This type of property insurance is referred to as builder’s risk (BR) or course of construction insurance, and it is most often written on an all-risk policy. All-risk policies insure against all possible property casualties, except for specifically excluded risks. Under a typical BR policy, the insurer agrees to pay for direct physical loss or damage to the covered property during construction, unless the loss is specifically excluded. The covered property usually consists of the building or structure under construction, as well as machinery, equipment, materials, and supplies that will become a part of the permanent structure. The purpose of purchasing this coverage is to protect against losses arising from the negligence of contractors, as well as certain acts of God, such as fire and lightning. BR insurance is, by its nature, intended to cover only new work, not preexisting structures. Accordingly, if a project involves improvement to an existing structure, the owner should consider purchasing an endorsement to expand the policy’s definition of covered property. Tunneling and other underground projects involve significant risks not characteristic to other forms of construction. As a result, underground work is one of the most difficult types of projects to underwrite for BR coverage. Some BR insurers will decline to quote these types of projects as a matter of corporate policy. Others provide coverage but impose limitations and thus such policies are written with special coverage exclusions; so special care needs to be taken when reviewing proposed BR coverage carrier forms to ensure that the contract risks are covered. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 186 Chapter 13 BR insurance only offers first-party coverage, protecting the insured against damage to its own property, not for the claims of a third party. Accordingly, a BR policy should name each owner, contractor, subcontractor, and design professional as an insured. BR policies are not written on industry standard forms and can significantly differ from carrier to carrier. This necessitates a careful review of any proposed BR program. Named insured wording, additional insured and waiver of subrogation provisions, covered perils (including earthquake and flood application), definition of testing, deductible structure, and coverage for equipment breakdown are just some examples of items that need to be carefully vetted on these programs. Another important consideration is the degree to which BR insurance covers costs indirectly resulting from a loss, such as delay damages, acceleration costs, lost use, and other consequential effects. Most BR policies exclude consequential damages and similar losses; however, these soft costs may be added back by a coverage extension. Any equipment or materials that will become a permanent part of the project can be covered while being stored off-site or in transit via a sublimit. (Sublimits are extra limitations in an insurance policy’s coverage of certain losses. They are part of the original limit—they do not provide extra coverage, but set a maximum to cover a specific loss.) It is important to make sure that the sublimit will adequately cover the value of the equipment or materials. Equipment being used on a construction project that will not be a permanent part or fixture of the building will be excluded under the BR policy. This equipment will need to be scheduled and covered on its owner’s or operator’s own equipment policy. Typically, a construction company that owns or operates equipment will cover all of its equipment on an annual insurance policy as a part of its corporate insurance program. With tunneling construction projects, sometimes the tunnel boring machine (TBM) will be scheduled via endorsement under the BR policy, even though it will not become part of the permanent project/structure. One advantage to this approach is that time element coverage (i.e., business disruption) can extend to the TBM. However, the most comprehensive way to cover the machine is on an equipment policy. Because of the high value of TBMs and the nature of their operation, coverage enhancements should be considered. Expenses incurred for the recovery of the TBM, immobilization expenses, delay in start-up, or even potential abandonment can be purchased, along with provisions for cutting tools, internal mechanical/electrical breakdown, and/or preventive measures applied when crossing faults or difficult geological conditions. All of these enhancements are subject to availability in the insurance marketplace. The valuation on the policy should also be at replacement cost, not actual cash value. Other Forms of Liability Automobile liability. Claims or suits that arise out of the ownership, maintenance, or use of automobiles are generally excluded under the standard CGL forms. Separate auto liability insurance is designed to cover bodily injury or property damage to a third party, resulting from the operation of an auto, and first-party damage to the vehicle itself. Auto liability offers a variety of coverages including liability, physical damage, medical payments, no-fault, and uninsured/underinsured motorist (UM/UIM) coverages. Aviation liability. Claims or suits that arise out of the ownership, maintenance, or use of aircraft are generally excluded under the standard CGL forms. Companies that elect to use private aircraft in their operations must purchase specialty insurance to cover their Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Insurance 187 aircraft liability loss exposure. Aircraft policies are not standardized and vary widely. Some insurers offer policies that combine aircraft liability and hull with other aviation coverages, such as aircraft products liability, airport liability, land-based general liability, and hangar keeper’s liability coverage. Watercraft liability. Claims or suits that arise out of the ownership, maintenance, or use of watercraft are generally excluded under the standard CGL forms. Companies that elect to use watercraft in their operations must purchase specialty insurance to cover this loss exposure. Any parties to a project that intend to utilize or operate watercraft should be required to carry watercraft liability coverage. Similar to aircraft liability, some insurers offer policies that combine liability coverage with property coverage for the vessel itself. Railroad protective liability. When a contractor is performing work for a railroad or for others on or near the railroad’s property, the railroad will likely request the issuance of a railroad protective liability policy. The policy is generally purchased by a contractor for the benefit of the railroad only (no coverage for the contractor). The contractor will be listed on the declarations page; however, no coverage exists within this policy for the contractor. A railroad protective policy also commonly includes coverage for physical loss or damage to certain specified railroad property. Terrorism coverage. A commercial terrorism policy covers damaged or destroyed property, including buildings, equipment, furnishings, and inventory, and even losses associated with business interruption. Terrorism insurance can also cover liability claims against a company associated with a terrorist attack. Terrorism is excluded under most insurance policies, but the coverage can be bought if it is backed by endorsement or insured under a separate policy. This coverage is especially important for BR policies because a claim could be denied if the cause of loss was found to be related to terrorism. Surety Bonds Surety is the promise of one party (the surety) to another party (the obligee) that a third party (the principal or obligor) will perform its obligations in an underlying contract between the obligee and the principal. Surety bonds are not technically insurance in that they guarantee the performance of the contract and are underwritten with zero loss expectancy. A surety bond is more similar to a bank loan or a letter of credit than an insurance policy, which has some degree of expected loss. Letters of credit are often used in lieu of surety performance bonds in construction outside the United States. Another key difference in a surety bond compared to an insurance policy is that when it pays out a claim, the surety will seek full restitution from the defaulting party (principal), as opposed to insurance where there is no expectation of reimbursement outside any applicable deductibles. In the construction industry, a performance bond (see the following section) assures that a contractor will complete the project for the owner in accordance with its contract, or that funding will be available from the surety for completion of the contract (up to the amount of the bond). If the contractor defaults on its contract, the surety will evaluate the situation and, where appropriate, step in to complete the contract on the contractor’s behalf or pay the owner’s extra costs incurred in getting the work completed. Contractors, likewise, may require subcontractors to provide surety bonds. In that case, the subcontractor is the principal and the general contractor is the obligee. Requiring surety bonds has several benefits. For the owner, the surety’s prequalification and underwriting process gives the owner reassurance that the contractor has the financial Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 188 Chapter 13 strength necessary to complete the contract. Contractors see the same benefit when they bond their subcontractors. Furthermore, the surety bond is a backstop for the obligee should there be issues completing the contract, and it guarantees that suppliers and subcontractors will be paid. As with insurance, the decision to require bonds comes down to tolerance for risk. Because risk is being transferred when a bond is issued, there are premiums and costs associated with the transaction. Typically, the premium is around 1%–3% of the contract value (for performance and payment bonds). When all subcontractors are bonded, there is a perception that an owner can expect to pay higher construction costs. However, owners should recognize that firms providing bonds have the greatest incentive to see that they fulfill their contract, because the firms and, in most cases, their owners have personally agreed to indemnify the surety against any loss. Types of Construction Surety Bonds Contractors will typically be required to provide different types of bonds on a construction project. Bid bond. If the contractor is awarded the job but then refuses to sign the contract, the bid bond surety will pay an agreed penalty, which is generally either the difference in price between the low defaulting bid and the next low bid, or a set penal sum, frequently 5% or 10% of the bid price. Performance bond. The contractor will perform the work in accordance with the construction contract and related documents per the promise of the performance bond. If the contractor defaults, the bond may require the surety to step in and complete the work, or it may be a pure indemnity bond that requires the surety to reimburse the obligee for its damage. Payment bond. If suppliers and subcontractors are not paid for materials and labor furnished to the contractor, the payment bond surety will pay according to the terms of the subcontracts or purchase orders. Bid bonds, performance bonds, and payment bonds are required on most federal projects and are common on many private projects as well. At the general contractor’s discretion, performance and payment bonds may also be required of subcontractors. RE LA TI O N S H I P BETW EEN CONTRACTU AL R ESP ONSIB ILIT IES AN D I N S U R A N CE The two primary mechanisms for risk transfer on construction projects are indemnity provisions and insurance agreements. In their contracts, owners, contractors, subcontractors, and suppliers routinely require downstream parties to indemnify and add them as additional insureds. Downstream subcontractors then similarly require their downstream subcontractors and suppliers to grant them the same status. In an indemnity agreement, one party (the indemnitor) promises to assume the liability of another (the indemnitee). The agreement typically utilizes one of three types of indemnity clauses: broad, intermediate, or limited. Broad-form indemnity agreements indemnify the owner for any loss arising from the project even if the loss is caused by the owner’s own negligence. Intermediate-form indemnity agreements indemnify the owner for the entire loss arising from the project if responsibility for some of the loss can be attributed to the Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Insurance 189 contractor. Limited-form indemnity agreements indemnify the owner only for the amount of the loss directly attributable to the contractor’s negligence. Indemnity clauses can be some of the longest and most complicated provisions in the contract. It is important to have a legal professional provide guidance as to the meaning and enforceability of these clauses. The vast majority of states have enacted anti-indemnity statutes that limit the permissible breadth and scope of indemnity provisions. If an indemnity clause is too broad, it may be declared void and unenforceable under a state’s anti-indemnity law. When drafting an indemnity provision, it is also important to consult a legal professional in order to understand the permissible level of indemnity in the given state. Indemnity agreements are not the same as insurance agreements. Indemnity agreements simply transfer liability from one party to another. Because an indemnity agreement is only as good as the indemnitor’s ability to pay for a loss, a financially defunct indemnitor provides no meaningful protection to the indemnitee. For this reason, owners often require contractors to obtain insurance to ensure that they have the financial ability to pay for an indemnified loss. Effectively, CGL insurance serves as the financial backstop/funding mechanism for indemnity agreements. Construction contracts require contractors to purchase specified limits of insurance and name the owner as an additional insured. Similarly, contractors require their subcontractors to purchase specified limits of insurance naming them as additional insureds on the subcontractors’ CGL policies. As an additional insured on the policy, the owner has direct access to the contractor’s CGL policy. This means that the owner can look to the contractor’s CGL policy for a defense of a claim that potentially could be covered by the policy, as well as damages paid that are covered by the policy. Additional insureds are added by endorsement, and coverage applies per the terms of the endorsement. Additional named insureds are the actual owners of the policy and therefore have full access to the policy coverages without restriction. Subrogation Subrogation is the principle under which an insurer that has paid a loss under an insurance policy is entitled to all the rights and remedies belonging to the insured against a third party with respect to the loss covered by the policy. Subrogation generally refers to both a legal right and a legal action. Subrogation can refer to either the insurer’s right to recover or the actual process of recovery by the insurer. As a condition of coverage, the insured not only agrees to transfer its rights of recovery to the insurer for loss paid, the insured also agrees to help the insurer enforce the insured’s rights against the liable third party and to do nothing after loss to impair the insurer’s rights of recovery. When certain conditions are met, however, those rights of recovery can be waived. A waiver of subrogation requirement can be included in an agreement between two parties in which one party agrees to waive subrogation rights against another in the event of a loss. The intent of the waiver is to prevent one party’s insurer from pursuing subrogation against the other party. Most insurance policies state that the insured may waive subrogation provided it is done as part of the contract between the insured and its client and is done at the outset of the job (not after a claim or loss has arisen). By giving up its right of recovery, the insurer accepts that the insured and the parties it has contracted with have transferred their risk for a covered claim. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 190 Chapter 13 Self-Insured Retentions and Deductibles SIRs and deductibles allocate a specified layer of risk to the insured, above which insurance limits attach. They give the insured more skin in the game and have the benefit of reducing premium costs. The major differences between SIRs and deductibles are (1) insurer responsibilities in the event of a loss, (2) collateral requirements, (3) defense costs, and (4) limits erosion. Insurer responsibilities. Under an SIR, the excess insurer generally has nothing to do with losses that do not penetrate its attachment point, which is the point at which excess insurance or reinsurance limits apply. The insurer may, however, require notification when a claim is reserved for an amount that pierces the attachment point. Under a deductible, however, the insurer pays every loss (up to the maximum limit of liability) and is then reimbursed by the insured up to the amount of the deductible. Collateral requirements. Insurers require collateral in situations where they assume credit risk. With SIRs, because the insurer has no responsibility for paying losses until the SIR is exhausted, there is no collateral requirement. Conversely, large deductibles very often require that the insured provide a letter of credit or some other acceptable form of collateral to cover expected losses that occur within the deductible. Defense costs. In the large deductible world (more than $100,000), whether defense costs erode the deductible is subject to negotiation, although they usually do. Under an SIR, the questions of who pays for defense costs and whether the SIR is eroded are irrelevant as the insured pays all expenses associated with defending claims until the loss exceeds the SIR. Limits erosion. Under an SIR, the policy’s annual aggregate limit is usually not affected by the SIR amount. Assume that the insured’s aggregate SIR under its policy is $100,000 and its total policy limit is $1,000,000. The insured would still have $1,000,000 of coverage in excess of the $100,000 SIR. Under a deductible arrangement, the annual aggregate limit is often eroded by the amount of the deductible. In the same scenario, under a deductible plan, the total limit of liability would also be $1,000,000, but $900,000 of it would be available from the insurer, and the insured would be responsible for the first $100,000. Certificates of Insurance A certificate of insurance is a standard document providing evidence of the insurance coverages, effective dates, and limits that have been purchased by the named insured. Certificates are issued by insurance brokers on behalf of the various insurance carriers. Certificates do not affirmatively or negatively amend, extend, or alter the coverage afforded by the policies outlined. Certificates also do not constitute a contract between the insurers, the authorized representative, and the certificate holder. Contracts will typically require that contractors (or subcontractors) furnish a certificate of insurance that evidences the contractually required coverages prior to the commencement of work. A certificate of insurance does not provide details of all the terms and conditions of the insurance program in place, but instead is a summary/snapshot, similar to the table of contents in a book. To know the full extent of coverage, a full copy of the policy would need to be reviewed. Because it can bring up additional questions that can require extensive explanation, there is often resistance to providing copies of policies to owners or contractors. Contracts will sometimes include provisions giving the owner or contractor the right Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Insurance 191 to request full copies of insurance policies, although in practice, this right is not widely acted on, and instead the contractual insurance requirements themselves are relied on. One situation where policies should certainly be obtained and reviewed is when one party procures insurance for another responsible party. For example, when an owner procures the BR coverage for the project, a copy should be made available to the contracting entity for review so it can evaluate potential gaps and confirm that the policy properly protects their interests. I N S U R A N C E F OR JOI NT V ENTU RES Properly insuring joint ventures (JVs) can be a complicated task for many reasons. For one thing, project insurance is not typically a priority for the contractor’s estimating professionals. Also, insurance approaches for the JV as a whole depend on the type of JV partnership (true vs. line item), the varying sophistication of the individual JV partners’ insurance programs, and the various casualty options and degrees of risk appetite, which can influence the deductibles and SIRs. It may seem logical that because each member in a JV already has an insurance program for its own operations, simply requiring each member to bring its own insurance to the JV project should suffice. However, as is typical in insurance contracts, insurance policies are filled with exclusions, limitations, and special definitions that limit or eliminate coverage, or push coverage onto other specialty insurance products where the exposure can be more adequately addressed. The most critical insurance exclusion facing JVs is found in the CGL policy under the definition of “Who Is an Insured.” As stated in this section, no one is an insured with respect to the conduct of any current or past JV that is not shown as a named insured in the policy declarations. This clause leaves the insured contractor with no CGL coverage for any participation in a current or past JV unless that JV is added as a named insured. The JV has different options based on whether it is a true JV or line-item JV. A true JV means that the JV entity holds the contract with the owner and has its own employees who receive payroll from the JV entity. It allows the partners to jointly make decisions on the execution of the project’s work plan and share in the profit and loss. Between the JV partners, there is an agreement that delineates the JV percentages based on capital contributions. The partners are always joint and several, which means each partner is 100% responsible for the entire contract. Generally, the lead in the JV is allowed to procure the insurance for the project utilizing its insurance relationships for project-specific required coverages (i.e., general liability, worker’s compensation, automobile liability, umbrella/ excess liability, and contractors’ equipment). This would be a separately purchased program with dedicated policies. These policies should be crafted to provide each member additional insured protection from the vicarious liabilities of the JV’s actions. The JV would not be added to the members’ own policies as a named insured or as an additional insured as this can create other unintended insurance problems (unless it is added strictly on an excess basis to the extent of that member’s liability). BR, however, would still be project specific and would typically be placed by the lead partner’s broker covering the owner, JV, and subcontractors’ interests. A line-item JV is typically set up when there is a large firm partnering with a smaller firm with a specialty that is conducive to the project. Another reason for this arrangement could Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 192 Chapter 13 be that the smaller firm is geographically beneficial with a relationship to the owner of the project, but the project is larger or more complex than the smaller firm normally can handle from a surety or workforce perspective. The line-item JV approach is used for projects where the work can easily be divided between the partners and each JV partner’s employees receive payroll from their usual employer. The JV still executes the contract in the name of the JV, but that is essentially the only joint aspect of the arrangement. Because of this, line-item JVs are often referred to as paper JVs. Behind the scenes, the JV agreement fully defines the scope of work for each partner. Generally speaking, the lead firm has at least 50% of the required capital for the project. Each of two options ensures this type of arrangement exists. Option 1: Each Member Insures Its Own Liability Multiple policies covering the JV’s liability may provide for a higher combination of limits. The drawback is that more than one policy could also provoke difficult legal battles (and increased claim-related legal expenses) over which policy is primary because of joint and several liabilities. For example, determining which entity responds to a claim made only against the JV can be difficult. Or, one member might find its loss experience impacted and its limits depleted because of the JV’s losses, regardless of fault. In addition, allocating premium cost back to the JV may be difficult for flat-rated policies like some umbrella policies. This can be one of the least expensive options, if the JV project is short in duration and there is adequate time and underwriter commitment to coordinate the endorsements needed. However, the underwriters must be willing to charge each insured only for the exposures it presents; otherwise, a premium auditor could pick up all exposures of the JV (because the JV is a separate named insured under its CGL policy). To prevent an insurer from trying to subrogate a claim it paid back to the other member, both members should add the other JV partner to their CGL policies as an additional insured and require a waiver of subrogation endorsement. Option 2: One Member Uses Its Own Insurance to Cover the Entire Risk One member of the JV will typically act as its managing member or sponsor. Generally, this sponsor controls the administrative responsibility that can include contract negotiation, jobsite safety, and the purchase of insurance. In such a situation, the sponsor may decide to use its current insurance program to insure the JV exclusively. Because there is only one set of underwriters to negotiate with, this is by far the easiest, quickest, and likely least expensive approach. With only one insurance policy for the JV, disputes over which policy will respond are eliminated. The downside of this option is that it exposes the sponsor’s loss experience and limits to all of the JV’s claims, regardless of who caused them. As a result, this option typically is not used unless the sponsor has true control over the project’s safety and work. The CGL and WC policy endorsements required by this approach are similar to Option 1, except the member that is not adding the JV to its policy would not provide any additional insured coverage or waivers of subrogation from its own insurance, because the JV would not be named to its existing policies. No two JVs are identical. Ample lead time and project information are critical to the insurance brokers’ and underwriters’ ability to put the best options for insurance and Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Insurance 193 risk transfer in place. With careful attention and planning, a JV can be a great vehicle for increasing the work available to contractors and delivering more value to project owners. U N I Q U E I N S U RANCE CONSI D ERATI ONS FOR A LT ER NA T IVE DELIVER Y The traditional procurement method of design-bid-build (DBB), which is often used on mainstream public works, involves the owner either completing the design in house or more typically, hiring a design team to design the project and put together the bidding documents. The design firms are responsible for the design liability and purchase professional design liability insurance to meet their contractual and legal responsibilities. The contractors and subcontractors are then responsible for insuring the agreed-on risks of the construction. The alternative delivery methods that have evolved over the past several decades include design-build (DB), construction management (CM)/construction management (CM) at risk, alliancing, and public–private partnership (PPP). In this section, we do not review all aspects of each method but simply point out some key considerations regarding insurance and risk that should be considered in each of these alternatives. Design-Build The key insurance-related issue for DB is the professional liability that the DB firm is undertaking. Many times, the construction entity will subcontract the design to a separate design firm. In this scenario, it is critical to require the designer to be responsible for its design liability and provide adequate liability limits for the project at hand. It is not uncommon for a design firm to try to limit its liability to its design fees. This represents an additional risk to the contracting entity. As previously noted, professional liability coverage as described elsewhere in this chapter is written on a claims-made basis, meaning claims have to be made during the policy term and any ERP provided in the policy. It is incumbent on the DB contractor to require an adequate ERP by the designer’s professional liability insurance policy, because if the designer does not renew its insurance, there is no protection for claims. The DB contractor should also carry contractor’s professional liability insurance to fill in the gap that occurs in its general liability policy for professional acts and its vicarious liability for the design of the project even though the DB contractor is not the designer of record. This is very important coverage as there has been a trend for general liability carriers to use the professional acts exclusion under their policies to deny liability claims. If nothing else, this contractor’s professional coverage provides defense costs to defend against potential disputes. Construction Management (CM) and CM at Risk The key insurance coverage of a CM is professional liability (contractor’s professional liability typically) as the CM is primarily providing professional advice and management of the project. The bulk of the risk is placed on both the general contractor and the subcontractors. CM at risk is very similar in insurance and risk exposure to traditional DBB construction. However, with CM at risk, there is more professional advice and counsel as well as negotiations with subcontractors that require the professional liability coverage in addition to all the other traditional coverages. A CIP (see the section, “Use of Consolidated Insurance Programs”) can be used on CM at risk projects as the CM is in a position to select Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 194 Chapter 13 the subcontractors and manage them to a good result. On pure CM projects, the CM lacks this control, so CIPs are not as common. Alliancing With alliancing, a project professional policy coupled with a CIP is a very good approach from an insurance standpoint as all parties have skin in the game and can implement a more coordinated insurance program. Public–Private Partnerships In the case of PPPs, the finance and investment entities will typically dictate the insurance requirements, so it is important to carefully review these requirements before finalizing the contract. These requirements also tend to be more challenging to comply with than typical public or private owner requirements. The coverages to consider for these projects during construction should align with the other delivery methods. However, insurance for any operation and maintenance (O&M) obligations should be placed separately. Insurance for O&M depends on the nature of the project and its operations. In addition to standard general liability, auto liability, workers compensation, and so forth, other coverages, such as permanent property, mechanical breakdown, and directors’ and officers’ liability, need to be considered as they would for any other ongoing company or business. USE O F C O N S O L I D ATED I NSU RANCE PROG R A MS A CIP is a centralized insurance and loss control program that covers the project owner and most, if not all, contractors and subcontractors. The use of CIPs has increased over the past several decades partly because of complexities in statutes, contract terms and conditions, legal environment, and the insurance industry’s reaction to these challenges. In the CIP arrangement, one party is responsible for procuring certain insurance coverages that will apply to all eligible contractors and subcontractors that perform work for the project. This approach is typically reserved for large projects with multiple subcontractors (e.g., more than $100 million). CIP programs are sometimes referred to as wrap-ups or wrap-up insurance. More popular is to combine the term CIP with some preface designation denoting the party that sponsors the program or some unique aspect of the program. Examples are OCIP for owner-controlled program, CCIP for contractor-controlled program (these programs are project specific), and RCIP for rolling controlled insurance program (multiple jobs covered under one program). In this section, the term CIP is used to designate all of these approaches. CIPs are more often utilized in vertical construction than in civil and underground construction. This is because vertical construction has a higher number of subcontractor trades involved. In part, this is because in the absence of a CIP, each party provides its own insurance to back its obligations. In the event of a claim, there could be multiple fingers pointed at the responsible party, and therefore multiple insurance carriers fighting about who is liable to pay the claim. This can make the claims process very inefficient and can even trigger multiple deductibles. These situations can cause significant impact on the construction schedule, resulting in serious financial consequences for all parties. On all larger projects, however, CIPs can be used to reduce the overall cost of the insurance and provide higher limits of coverage for all involved. The primary benefits of Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Insurance 195 TABLE 13-1 Required insurance covered by CIP Covered by CIP Covered by Individual Contractors • On-site general liability (for a specified period) • General liability (for off-site activities) • Workers’ compensation/employers’ liability (for on-site activities) • Workers’ compensation (for off-site activities) • Builder’s risk (including transit coverage and off-site storage) • Excess liability (for off-site activities) • Umbrella/excess liability • Automobile liability • Pollution liability • Pollution liability (unless included in the CIP) • Professional liability • Professional liability (unless included in the CIP) • Contractor’s equipment • Aircraft/marine/watercraft liability (if applicable) a controlled insurance program—as compared to conventional construction insurance and loss control programs—include opportunities for cost savings, greater control, and improved insurance coverages. Cost reductions are realized from an emphasis on safety and loss control, claims management, a reduction in litigation between insurers, improved security, and the generation of greater discounts and negotiating leverage. With some projects, the primary benefits of a CIP may also include assurance of proper coverages and limits of liability, opportunities for small local and disadvantaged contractors, and enhanced control of loss prevention activities. To some owners, these benefits are as valuable as the direct cost savings that may be realized with a CIP. The CIP covers some, but not all, of the required insurance, as noted in Table 13-1. Consolidated Insurance Program Advantages and Disadvantages In summary, a CIP may have many advantages that should be considered in determining whether a consolidated program is best for any specific project: ■■ Lower costs caused by bulk purchase of insurance ■■ Broker and underwriting insurer enforcing more stringent safety and loss control procedures ■■ Reduction in time required to obtain insurance certificates for contractors ■■ Improved efficiency in claims handling ■■ Responsible party having direct control over policy design, structure, and terms and conditions, as opposed to relying on various individual contractors (especially with respect to additional insured protection for contracting parties) ■■ Potential for greater insurance limits and coverage depth and breadth that contractors could not otherwise obtain ■■ Potential for contractors, especially small local and disadvantaged ones, to work on projects that they would not otherwise be able to Of course, the disadvantages must also be considered: ■■ Increased administrative burden and accounting effort that are required to isolate contractor and subcontractor costs and insurance burden ■■ Potential for contractors to claim for nonproject injuries not actually covered under CIP ■■ Contractors possibly having less incentive to control losses if they are not buying their own insurance (Deductible responsibility can counteract this.) Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 196 Chapter 13 ■■ Less total coverage available when multiple defects with multiple independent causes arise, for which each responsible subcontractor previously would have brought its own carrier, policy, and coverage limits to the table ■■ In some CIPs, defense costs eroding policy limits, which is not true of conventional CGL policies ■■ Potential gaps in insurance coverage ■■ Contractor resistance caused by disruption of the contractor’s longstanding relationships with current broker and insurers ■■ Removal of the economic benefit a contractor may have by virtue of having a low experience modification rate (EMR) resulting from a good safety record, in essence, leveling the playing field with respect to WC rates Owner-Controlled Versus Contractor-Controlled Insurance Programs As mentioned previously, the sponsor of the CIP can be either the owner of the project (OCIP) or the contractor (CCIP). Either program is structured the same way. The primary differences are responsibility for premium payments, limits purchased, terms and conditions, and claims handling for not just during the term of construction but for the statute of repose in the state in which the project is built. Both programs also have the responsibility of communicating the coverages and enrollment requirements and ensuring that all parties are properly enrolled in the program and are informed of all procedures in the event of a claim. Many owners have been convinced by the insurance broker community that they should control the insurance and realize the potential savings. This can be true, but oftentimes, the savings are overstated and the owner takes on significant responsibility and liability with little or no savings achieved. The contractor, however, is often in the best position to control and manage this risk and coordinate safety and claims handling, which can have a significant impact on the overall results of the program. When an owner has multiple similar projects or phases of projects that involve multiple general contractors, it can benefit from packaging multiple projects into what is called a rolling CIP (RCIP) and achieve potentially better pricing and terms. A contractor can also do this by implementing an RCIP for multiple similar projects over a defined period. Critical Determining Factors When determining whether the owner or contractor should control the CIP, the following critical decision factors should be considered: ■■ What are the goals and desired outcome for the project? ■■ Who is in a position to achieve the most successful outcome? ■■ How do OCIP owner/broker experience and CCIP contractor/broker experience compare? ■■ Is this a new venue, market, and so forth, for either the owner or the contractor? ■■ Who benefits the most from success, and who risks the most from failure? ■■ What other factors are in play regarding the project, for example, key players, venue-specific needs, the owner-contractor relationship, and/or opportunities for disadvantaged contractors? Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Insurance 197 C O N C LU S I O N S AND RECOM M END ATI ON S The implementation of better contract practices requires key project participants, not just insurance professionals, to be knowledgeable about how risks are allocated between the parties for underground construction projects. In addition to addressing these risks through technical and contractual methods, this includes understanding the types of insurance products available and knowing who to contact to navigate a project from planning through construction. Based on the discussion in this chapter, the following recommendations are made with regard to insurance approaches on underground construction projects: ■■ Recommendation 13-1: Owners, design teams, and contractors should involve their insurance and risk management consultants early in the process to properly assess project risk and structure the most comprehensive and cost-effective insurance program to address those risks. ■■ Recommendation 13-2: Contracts should include carefully crafted indemnity provisions, supported by appropriate insurance requirements for each party involved. These insurance requirements should align with the relative risks that each party assumes, and address all relevant and unique risks to a project. ■■ Recommendation 13-3: Joint Venture (JV) agreements should include clear language on how project risks will be transferred, and who is responsible for procuring all applicable lines of insurance coverage. ■■ Recommendation 13-4: Insurance factors should be considered when making the delivery method decision, and to ensure a properly structured program. ■■ Recommendation 13-5: Consolidated insurance programs (CIPs) can be an effective approach to insuring large projects. In determining whether to utilize this structure and whether it should be purchased by the owner or the contractor, care should be taken to analyze all advantages and disadvantages, as well as the overall goals of the project teams. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 14 1 Summary of Recommendations I N TR O D U C TION This book provides guidance for better contract practices intended to produce fairer, more balanced contracts for underground construction projects. These contracts can be administered in such a way that projects are cost-effective for owners and profitable for contractors. A few of the ingredients for a successful project are risk that is allocated to the party best equipped to manage it, characterization of the ground in a way that is measurable for assessment and changes, and design requirements that are clear and enforced to the extent required by the contract (no more and no less). But other ingredients are also needed: Insurance and delivery method decisions should be calibrated to the owner’s risk tolerance and acceptable level of design control. Management for each contract party must commit to providing resources and resolving issues in ways that safeguard the end goals for all parties. Project budgets and schedule baselines should be tailored based on realistic and thorough analysis of the work and known conditions. To implement these elements and more, this book includes the following recommendations. R E LA TI O N S H I PS ■■ Recommendation 1-1: The contract terms should align risk and financial responsibilities of the participants with the party that has control, and each party must embrace its own responsibilities. ■■ Recommendation 1-2: All underground projects should include partnering as a method to highlight the executives’ attitude of good faith and fair dealing, which is critical to the success of the project. The project executives must establish the ultimate project objectives, honestly communicate with each other about issues and concerns, lead by example, and ensure that their communication policies flow down to all the project participants. ■■ Recommendation 1-3: Owners should avoid inequitable terms in the contract language. Such harsh, unfair, or inequitable terms will likely yield fewer bidders, higher bids, constant contentiousness, and greater legal costs. Image © Washington State Department of Transportation Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 199 Chapter 14 200 PR O J E C T P L A NNI NG ■■ Recommendation 2-1: The owner should select people who have underground experience for its planning and project teams, accounting for the disciplines required for its unique project. This will typically require engagement of underground specialists to augment the owner’s staff. ■■ Recommendation 2-2: A thorough and accurate needs assessment is required to ensure that the project will meet the owner’s expectations and objectives. When evaluating alternatives, the intangible value of placing the constructed facility underground should be considered. The decision-making process should include a cost–benefit evaluation not only of the capital construction cost but also of the life-cycle cost and long-term value to the overall community. ■■ Recommendation 2-3: Estimates developed during the feasibility study should not be used to establish final capital budgets. However, conceptual design-level cost estimates can generally be used for this purpose, if sufficient contingency has been included to allow for risks and uncertainties. ■■ Recommendation 2-4: The owner should consider which regulatory permits are best obtained by which parties and at what stage. Owners should obtain some permits before advertising, whereas others should be left for the contractor to obtain after contract award. ■■ Recommendation 2-5: The planning team should allow for staging areas that are sized adequately for the expected construction operations. ■■ Recommendation 2-6: The owner should consider the advantages and disadvantages of incorporating a project labor agreement (PLA) and should obtain input from local contractors concerning local customs and practices and from underground contractors about specific work rules affecting subsurface work before finalizing the PLA with the labor unions. S U B S U R F A C E C OND I TI ONS ■■ Recommendation 3-1: The guidelines set forth in the U.S. National Committee on Tunneling Technology (USNCTT)’s 1984 report and more recent summaries of the level of investigation effort published by International Tunnelling and Underground Space Association (ITA) Working Group 2 (ITA 2015) should be used as a guide in planning and conducting geotechnical investigation programs. Owners and project sponsors should modify the level of effort based on their tolerance for risk and ability to cope with changes caused by differing site conditions. Sufficient budget and schedule should be allocated to the investigations at all phases. ■■ Recommendation 3-2: The investigation should be tailored to the complexity of the project site conditions and focused to investigate risks presented by the site and the construction methods contemplated for the project. As the investigation proceeds, it is useful to reassess the risks and refocus supplemental investigations based on early findings. ■■ Recommendation 3-3: The recommendations set forth in Geotechnical Baseline Reports for Construction: Suggested Guidelines (Essex 2007) should be followed in the preparation of geotechnical reports. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Summary of Recommendations 201 ■■ Recommendation 3-4: Include both the geotechnical data report (GDR) and geotechnical baseline report (GBR) as contract documents, and define precedents in case of conflicts. Construction contract documents should include these two reports but exclude any geotechnical interpretive reports, which may be made available to the bidders for information only. ■■ Recommendation 3-5: . Depending on the scale of the project, complexity of anticipated subsurface conditions, and the amount of geotechnical work performed in advance by the owner, preparers of design-build tender documents should consider including requirements for confirmation of design parameters through the performance of additional geotechnical exploration and testing. Baseline geotechnical conditions may need to be adjusted accordingly. R I S K M A N A G EM ENT ■■ Recommendation 4-1: Project owners and their consultants should address, at the very beginning of planning, the uncertainty associated with underground projects. Owners should select and require all partners to use a comprehensive and documented risk planning, identification, mitigation, monitoring, and control process. ■■ Recommendation 4-2: Risks should be allocated to the parties that are in the best position to control them. Risk allocation should be clearly identified in the contract documents so that the appropriate cost for controlling the risk is included in the bid price. ■■ Recommendation 4-3: In quantifying cost impacts of risk events for underground projects, particular attention should be given to accounting for associated high cost of schedule delays, which are often a result of the large value of the equipment spread and the high velocity of cash flow. ■■ Recommendation 4-4: The risk management process should continue throughout the life of the project, from planning through design and construction, with risks documented and managed to the extent possible with the tools available during each phase of the project. Rigorous ongoing monitoring of all project risks and evaluation of mitigation measures should be performed, regularly determining the status of a particular risk as well as any resultant residual risk. Risk registers should be continuously updated, and the effectiveness of mitigations should be assessed periodically, focusing on forward-looking mitigation of upcoming risks. ■■ Recommendation 4-5: Owners should investigate the relationship between their risk management efforts and their insurance carrier. Risks that are covered by insurance will likely have a significant impact on premium costs, key project decisions, and how the project is designed. ■■ Recommendation 4-6: Schedule uncertainty should be evaluated in providing a clear understanding of the risks on a project. This knowledge would inform the owner and other project participants as to likely completion dates and the impact of not mitigating schedule risks to the project. DESIGN ■■ Recommendation 5-1: Where underground solutions are technically feasible, the evaluation of alternative alignments should consider the impact of increased property Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 202 Chapter 14 values around underground transportation projects, and the life-cycle cost benefits on tunneled water/wastewater projects. ■■ Recommendation 5-2: Use CI/ASCE 38-02 or its equivalent for the collection and depiction of existing subsurface utility data. ■■ Recommendation 5-3: Include and clarify responsibility for mitigation measures as set forth in the environmental documents and risk registers in contract documents as appropriate for design-build (DB) or design-bid-build (DBB) contractor’s scope of work. This exercise also helps establish the basis for prescriptive versus performance specifications for various aspects of the design. ■■ Recommendation 5-4: Use building information modeling (BIM) for complex underground projects as well as for final as-built models for the owner’s use with the facility’s operations and maintenance. ■■ Recommendation 5-5: Clearly indicate in contract documents the party (or parties) responsible for utility maintenance, protection, support, and relocation. For DBB contracts, indicate all major utility lines in the contract documents. For DB projects, the DB contractor may be responsible for identifying all minor utility lines and designing required support, protection, and relocation. Contract documents should include a provision that major lines found in locations not shown may be considered a differing site condition. The quality/source of the utility data should be clearly identified. ■■ Recommendation 5-6: In addition to utility coordination, other third-party inputs such as for permitting, approvals, or designs also need to begin early to identify the requirements and to schedule the approval process within the contract documents. ■■ Recommendation 5-7: For DB contracts, the submittal of early, separate design packages should be anticipated for advanced work such as utility relocation, support of excavation, and demolition to enable work to begin on a portion of the project before the total design is complete and allow overlapping design and construction. ■■ Recommendation 5-8: For underground contracts (DB or DBB), the designer may specify the submittal of working drawings depicting means and methods that are important to the design concept. However, the scope of the submittal review should be limited to what is necessary to verify design intent and ensure that agreements with third-party stakeholders are kept to afford the contractor as much flexibility as possible to incorporate innovative technological solutions. ■■ Recommendation 5-9: The engineer-of-record (EOR) or his or her representative should be on-site full-time during initial mobilization to ensure efficiency of submittal review and when underground excavation is underway to verify that actual conditions are as anticipated and to make design revisions if necessary. This includes reviewing instrumentation data against anticipated performance of excavations. ■■ Recommendation 5-10: To reap the benefit of the contractor’s innovation, a value engineering change proposal provision should be incorporated into all underground construction contracts. ■■ Recommendation 5-11: Consider project useful life and consider requirements for durability for inclusion in the contract documents. Such requirements would include design life, durability studies, and compliance with applicable standards for materials exposed to the environment. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Summary of Recommendations 203 ■■ Recommendation 5-12: For DB procurements, the detailed scope of work expected of the design team should be clearly set forth in the DB solicitation documents, so that an accurate level-of-effort estimate can be included in the contract price. ■■ Recommendation 5-13: The owner’s expected order of precedence of the contract documents should be known by all designers starting from the preliminary design phase to establish what information should be represented on plans versus specifications versus special conditions and/or provisions. The availability and applicability of agency standard plans and specifications should also be established at the preliminary stage of design development. C O N S TR U C TI ON M ANAGEM ENT ■■ Recommendation 6-1: Only individuals who have the specialized skills and talents needed for the anticipated underground construction methods and delivery systems should be selected for the construction management team. ■■ Recommendation 6-2: The designated construction manager should be afforded the opportunity to perform a constructability review during design, and also to review and comment on the final design documents. C O S T E S TI M A TES ■■ Recommendation 7-1: The budget for an underground project should not be established on the basis of generalized cost factors, but only after developing a bottom-up cost estimate that considers the project scope, ground conditions, required schedule, and feasible methods of construction. ■■ Recommendation 7-2: The design development for an underground project can be more effective if the cost estimator is an integral part of the design team instead of being considered as a follow-on activity. Using independent cost estimators can be an effective method of providing quality control. ■■ Recommendation 7-3: The contract time of performance should be finalized after the engineer’s estimate is complete and should represent a realistic estimate of the time necessary to complete the work using any allowable methods. ■■ Recommendation 7-4: Risk and uncertainty should be applied to determine a range of risk contingencies for cost (and time) and should be included for each phase of project development and transparently reduced as a function of remaining risks as the project progresses and uncertainties and risks materialize. ■■ Recommendation 7-5: The engineer’s estimate should be published in the bid advertisement. SCHEDULES ■■ Recommendation 8-1: Underground project schedules should be prepared with input from personnel who are experienced in underground construction methods to ensure that activity durations and project completion time frames are realistic. This recommendation applies to both contractor and owner staffs. ■■ Recommendation 8-2: Linear schedules can be used to graphically illustrate the planned production for underground construction projects and can be combined Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 204 Chapter 14 with critical path method (CPM) schedules to illustrate dependencies, hold points, and interim milestones. ■■ Recommendation 8-3: Periodic progress payments to the contractor should not be solely based on a cost-loaded CPM schedule. Approximate costs can be generated within the schedule for forecasting cash flows, and monthly payment determinations can be based on the separately maintained schedule of values. ■■ Recommendation 8-4: During construction, the contractor should get exclusive and subsequent use of all float generated by its own efforts on projects when a liquidated damages clause is included within the contract. Conversely, the owner should get the use of all float generated by the early completion of owner activities, the early delivery of critical path owner-furnished material, and the deletion of critical path work. ■■ Recommendation 8-5: Any requirement dictating a time frame for submittals of project baseline schedules must include consideration of the complexity and size of the project, the number of activities within the baseline schedule, adequate subcontractor input, and enough overlap with a project initial or preliminary schedule to account for a minimum number of baseline submittal review cycles. ■■ Recommendation 8-6: For design-build (DB) contracts, typically the design phase is on the critical path in the early stage of the project, and design activities should be treated equally to any physical construction activity, including defined resource allocations and accurate measuring of progress. ■■ Recommendation 8-7: When liquidated damages are included in the contract and attached to interim milestones and substantial completion, it recommended that suitable incentives be considered for early completion of the same milestones. PR I C I N G A N D PAYM ENT PROV I SI ONS ■■ Recommendation 9-1: Cost-loaded critical path method (CPM) schedules should not be used for payment purposes. ■■ Recommendation 9-2: Contracts should include a provision for mobilization payments based on the contractor’s anticipated up-front expenditures. Funds allocated to mobilization should not be withheld for demobilization. ■■ Recommendation 9-3: Variation in quantity clauses are recommended for all unit price contracts and should clearly specify that, without agreement of the contractor, these clauses may not be applied to extra or changed work. ■■ Recommendation 9-4: The use of provisional payment provisions is recommended for unknown and/or speculative quantities. ■■ Recommendation 9-5: The owner should pay the full invoiced costs, including storage and insurance, for all substantial items of suitably stored, manufactured materials and equipment on proof of manufacturing compliance, delivery, payment to the supplier, and storage security. ■■ Recommendation 9-6: All construction contracts of more than four years in total duration should consider escalation provisions for materials. ■■ Recommendation 9-7: Incentive provisions are recommended in instances where early completion benefits the owner and is realistically achievable, the owner’s resources can keep up with the faster schedule, the reward is sufficient to motivate Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Summary of Recommendations 205 performance, and the provisions include features that recognize and provide relief for delays beyond the contractor’s control. ■■ Recommendation 9-8: Retention provisions should allow for progressive release as the work is satisfactorily completed. Contractors should be allowed the options of having the retained funds deposited in an interest-bearing account, substituting securities to be held in an escrow account, or providing a bond. The release of retention should not be withheld unreasonably and should be administered in accordance with the original intent of the contract. ■■ Recommendation 9-9: For design-build (DB) projects, the bid schedule and/or the schedule of values should consider separate payment items to cover the costs of project design and design services during construction. C O N TR A C TS ■■ Recommendation 10-1: A procurement model, including both delivery and pricing methods, should be chosen based on careful and informed deliberation of all aspects of the project, as well as a self-assessment of the owner’s own organization’s capability to administer the selected procurement approach within its established procurement and administrative guidelines. ■■ Recommendation 10-2: In accordance with the Brooks Act, designers and other professional service providers should be selected based on verifiable and well-researched qualifications rather than price. ■■ Recommendation 10-3: Owner organizations should seek advice from engineers and attorneys with underground contracting experience and adopt fair and balanced terms and conditions, considering underground industry standard practices that will solicit competitive proposals from qualified construction contractors. The contract terms and conditions should clearly reflect the procurement approach, unique site conditions, risks, and corresponding responsibilities of the parties. ■■ Recommendation 10-4: Owners should verify that bidders are qualified, by either establishing a prequalification or shortlisting program. Such a program should be project specific, transparent, auditable, and not overly burdensome, to attract the responses from the most qualified and experienced firms. CHANGES ■■ Recommendation 11-1: Owners should consider benefits to be obtained from incorporating change avoidance concepts during the design development, and by use of contract awards to other than the low bidder, for example, by evaluating technical proposals as part of a best value or two-phase procurement process. ■■ Recommendation 11-2: Contract provisions regarding change proposals should allow the contractor sufficient time to calculate cost and schedule impacts, and the owner sufficient time for analysis, but the allowed time should be short enough to keep the issue from stalling the job. The provisions should allow the contractor to apply for extensions to deal with complex changes. ■■ Recommendation 11-3: The differing site conditions clause should not specify relief by equitable adjustment but instead should reference the administrative provisions of the changes clause for the calculation of the allowable cost and time adjustment. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Chapter 14 206 ■■ Recommendation 11-4: The owner should actively engage in discussions to mitigate cost/time impacts of differing site conditions in a timely manner, even where entitlement is not clear, as by so doing, the consequences of delays and increased cost are minimized. ■■ Recommendation 11-5: With the exception of project-specific work stoppages resulting from the contractor’s actions, general labor unrest should be included as an allowable force majeure event. ■■ Recommendation 11-6: To encourage the pre-pricing of extra work and compensate the contractor for assuming the risk of performance, contract language should establish a separate, and higher, profit allowance for changed work done pursuant to a pre-agreed-on price than the markup allowed for time-and-materials (T&M) work. ■■ Recommendation 11-7: To facilitate agreement on contractor-owned equipment used for extra work, the contract should stipulate use of a published rate manual, such as those issued by EquipmentWatch or the U.S. Army Corps of Engineers, which establish methods for calculating reasonable equipment rates on specialized equipment. ■■ Recommendation 11-8: For extra work, the cost of small tools and supplies should be recognized as allowable by either including a stipulated percentage or establishing a percentage based on the actual direct cost of small tools and supplies as indicated in the contractor’s accounting system, and by applying this percentage to all labor costs allowed for the extra work. ■■ Recommendation 11-9: The contract documents, either through the use of bid items or the changes clause, should recognize the cost of extended overhead and allow additional compensation in the event that changed or extra work extends the contract duration. ■■ Recommendation 11-10: Markup provisions should provide separate percentage markups—one for overhead and another for profit—and should not require a credit for the overhead markup on deducted work. The prime contractor should be allowed a markup on subcontract changes. ■■ Recommendation 11-11: On design-build (DB) projects, the contract documents should define the basis for establishing allowable overhead rates for professional services. ■■ Recommendation 11-12: Contract provisions should be very clear as to the owner’s position on the contractor’s right to finish early and the entitlement to delay costs for the period before the contract-specified completion date. D I S P U TE R E S O L U TI ON ■■ Recommendation 12-1: Executive-level partnering should be employed on all underground projects. ■■ Recommendation 12-2: Escrow bid documents should be used to help resolve disputes on underground projects, but use of such documents should be restricted to the resolution of quantum issues, after entitlement has been established by other means. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Summary of Recommendations 207 ■■ Recommendation 12-3: A dispute review board (DRB) should be used in all underground construction contracts and should be structured so that the DRB hearing occurs before the owner’s final decision. INSURANCE ■■ Recommendation 13-1: Owners, design teams, and contractors should involve their insurance and risk management consultants early in the process to properly assess project risk and structure the most comprehensive and cost-effective insurance program to address those risks. ■■ Recommendation 13-2: Contracts should include carefully crafted indemnity provisions, supported by appropriate insurance requirements for each party involved. These insurance requirements should align with the relative risks that each party assumes, and address all relevant and unique risks to a project. ■■ Recommendation 13-3: Joint venture (JV) agreements should include clear language on how project risks will be transferred, and who is responsible for procuring all applicable lines of insurance coverage. ■■ Recommendation 13-4: Insurance factors should be considered when making the delivery method decision, and to ensure a properly structured program. ■■ Recommendation 13-5: Consolidated insurance programs (CIPs) can be an effective approach to insuring large projects. In determining whether to utilize this structure and whether it should be purchased by the owner or the contractor, care should be taken to analyze all advantages and disadvantages, as well as the overall goals of the project teams. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Additional Reading Ang, A.H.-S., and Tang, W.H. 1984. Decision, Risk, and Reliability. Vol. 2, Probability Concepts in Engineering Planning and Design. New York: Wiley and Sons. Ariaratnam, S.T., Allouche, E.N., Biggar, K.W., et al. 1999. Applications of horizontal sampling and logging technologies in geotechnical site investigations. In GeoEngineering for Underground Facilities. Edited by G. Fernandez and R. Bauer. ASCE Geotechnical Special Publication No. 90. Reston, VA: American Society of Civil Engineers. pp. 93–104. AS/NZS 4360. 2004. Risk Management. Sydney: Standards Australia International; Wellington: Standards New Zealand. Ashley, D.B., Diekmann, J.E., and Molenaar, K.R. 2006. Guide to Risk Assessment and Allocation for Highway Construction Management. Report No. FHWA-PL-06-32. Washington, DC: Federal Highway Administration. Attewell, P.B. 1995. Tunneling Contracts and Site Investigation. London: Spon Press. Benjamin, R.J., and Cornell, A.C. 1970. Probability, Statistics and Decision for Civil Engineers. New York: McGraw-Hill. Bielecki, R. 1997. Construction of the 4th tube of the Elbe Tunnel in Hamburg: The project, risks, risk assessment analysis of adverse events. [In German.] In Proceedings of Tunnels for People World Tunnel Congress 1997, Vienna, Austria. Brookfield, VT: A.A. Balkema. pp. 735–742. Chamley, P.J., Bassford, C., and Tindall, S. 2000. The project team approach to the management of risk for a major tunneling contract at Kingston upon Hull. Am. Underground Constr. Assoc. News 15(3):22. Cowles, B., Guardia, R.J., Robinson, R.A., et al. 2005. Predicted versus actual obstructions for two pipe-jacked tunnels of the Henderson CSO, Seattle, Washington. In Rapid Excavation and Tunneling Conference: 2005 Proceedings. Edited by J.D. Hutton and W.D. Rogstad. Littleton, CO: SME. pp. 1253–1261. Image © Fulcher/Elioff Collections Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 209 210 Additional Reading Dawson, C.W., and Tokle, V. 1999. Directional core drilling, the state-of-the-art. In Rapid Excavation and Tunneling Conference: 1999 Proceedings. Edited by D.E. Hilton and K. Samuelson. Littleton, CO: SME. pp. 351–362. Department of Infrastructure and Regional Development, Commonwealth of Australia. 2015. National Alliance Contracting Guidelines: Guide to Alliance Contracting. Canberra, Australia: Australian Government. Einstein, H.H., Xu, S., Grasso, P., et al. 1998. Decision aids in tunneling. World Tunnel (April): 157–159. Eskesen, S.D, Tengborg, P., Kampmann, J., et al. 2004. Guidelines for tunnelling risk management: International Tunnelling Association, Working Group 2. Tunnelling Underground Space Technol. 19(3):217–237. Hatem, D.J. 1997. Risk allocation and dispute resolution on construction projects, roles and challenges for legal counsel. CA/T Prof. Liability Rep. 2(4):1–15. Hatem D.J. 1998. Changing roles of design professionals and constructors: Risk allocation, management and insurance challenges. CA/T Prof. Liab. Rep. 3(3):1–16. Hoek, E. 2007. Practical Rock Engineering. www.rocscience.com. Accessed January 2019. Howard, A., Salisbury, N., and Tunison, S. 2005. Horizontal geotechnical investigations for tunneling. In Rapid Excavation and Tunneling Conference: 2005 Proceedings. Edited by J.D. Hutton and W.D. Rogstad. Littleton, CO: SME. pp. 792–803. Hunt, R.E. 1984. Geotechnical Engineering Investigation Manual. New York: McGraw-Hill. International Tunnelling Association. 1992. Recommendations on the Contractual Sharing of Risks, 2nd ed. Oslo: Norwegian Tunnelling Society. Martin, B., and Sadek, S. 2004. Contemporary methods of budget preparation. In North American Tunneling: 2004 Proceedings. Edited by L. Ozdemir. Rotterdam, The Netherlands: A.A. Balkema. Palstrom, A., and Broch, E. 2006. Use and misuse of rock mass classification systems with particular reference to the Q-system. Tunnelling Underground Space Technol. 21(6):575–593. Parker, H.W. 1996. Geotechnical investigations. In Tunnel Engineering Handbook. Edited by J.O. Bickel, T.R. Kuesel, and E.H. King. New York: Chapman and Hall. pp. 46–79. Rawlings, C.G., Anderson, J.M., and Lance, G.A. 1998. Preconstruction assessment strategy of significant engineering risks in tunnelling. In Proceedings of Underground Construction in Modern Infrastructure, Stockholm, Sweden, June 1998. Brookfield, VT: A.A. Balkema. pp. 191–198. Reilly, J.J. 2003. The relationship of risk mitigation to management and probable cost. In Reclaiming the Underground Space. Edited by J. Saveur. Boca Raton, FL: CRC Press. Reilly, J.J. 2005. Cost estimating and risk—management for underground projects. In Underground Space Use: Analysis of the Past and Lessons for the Future. Edited by Y. Erdem and T. Solak. Boca Raton, FL: CRC Press. pp. 533–538. Reilly, J.J. 2006. Risk identification, risk mitigation and cost estimation. In Tunnelling and Trenchless Construction. London: Mining Communications. Robinson, R.A., Kucker, M.S., Lehnen, M.J., et al. 2005. Impacts of geotechnical issues on design of the Beacon Hill Tunnel and Station Project. In Rapid Excavation and Tunneling Conference: 2005 Proceedings. Edited by J.D. Hutton and W.D. Rogstad. Littleton, CO: SME. pp. 767–779. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Additional Reading 211 Robinson, R.A., Parker, H.W., and Thompson, S.R. 1983. Geotechnical aspects of the Mt. Baker Ridge tunnel design. In Rapid Excavation and Tunneling Conference: 1983 Proceedings. Edited by H. Sutcliffe and J.W. Wilson. Littleton, CO: SME. pp. 343–362. Tait, J., Delmar R., Charalambu H., et al. 2007. Design/build agreement for the Niagara Tunnel Project. In Rapid Excavation and Tunneling Conference: 2007 Proceedings. Edited by M.T. Traylor and J.W. Townsend. Littleton, CO: SME. Thompson, D.E., Humphrey, J.T., Young Jr. L.W., et al. 1980. Field Evaluation of Advanced Methods of Subsurface Exploration for Transit Tunneling. Report No. UMTA-MA-06-0100-80-1. Washington, DC: U.S. Department of Transportation. U.S. Department of Energy. 2004. Cost Estimating Guide for Program and Project Management. Publication G 430.1-1X. Washington, DC: U.S. Department of Energy. U.S. National Committee on Tunneling Technology Subcommittee on Contracting Practices for the Superconducting Super Collider. 1989. Contracting Practices for the Underground Construction of the Superconducting Super Collider. Washington, DC: National Academy Press. Waggoner, G., ed. 1984. Geotechnical Site Investigations for Underground Projects. Washington, DC: National Academy Press. Ward, D.C., Robinson, R.A., and Hopkins, T.W. 2002. Managing uncertainty and risk, the exploration program for Seattle’s proposed light rail tunnels. In North American Tunneling: 2002 Proceedings. Edited by L. Ozdemir. Rotterdam, The Netherlands: A.A. Balkema. pp. 219–228. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Index A A+B bidding, 126–127 AACE International, 91, 94 advanced partial design units (APDUs), 65 agency construction management, 77. see also construction mantagers alliancing, 4, 134–135, 194 all-risk policies, 185–186 alternatives analysis, 12–14, 60, 88 American Arbitration Association (AAA), 169, 171, 173 American Institute of Architects (AIA), 143 American Society of Civil Engineers (ASCE), 33, 168–169 American Society of Professional Estimators, 91 appellate proceedings, 176 arbitration, 173–174 Association of British Insurers (ABI), 54 automobile liability, 186 aviation liability, 186–187 B bar charts, 105 bench trials, 176 Better Contracting for Underground Construction (USNCTT), 33, 132, 164 bid bonds, 188 bid schedules, 116, 117 biddability reviews, 70, 81–82 bill of quantities, 116 boards of consultants, 69 bridging documents, 41–42 British Tunnelling Society (BTS), 54 Brooks Act (Public Law 92-582), 139, 145 budgeting, 88–89, 97 builders’ risk (BR) insurance, 185–186 building information modeling (BIM), 61, 62f., 74 Bush, G.W., 19 C Capital Investments Grant Program, 20 Certified Construction Managers (CCMs), 80 changes clause benefits of, 147, 160 change avoidance, 148–149 as compensation for unknown quantities, 121 delay events, 157–158 determining merit, 151 differing site conditions (DSCs), 151–152, 160 early finishing, 160, 161 elements of cost, 155–157, 161 entitlement, 151 force majeure, 152–153, 160 notice, 149–150 overhead and profit allowances, 158–159 Image courtesy of Traylor Bros. Inc. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 213 Index 214 overview, 142, 147–148 performance bonds, 159–160 pricing provisions, 153–155 recommendations, 160–161, 205–206 claim evaluation, 82–83 Clinton, W.J., 18–19 Code of Practice for Risk Management of Tunnel Works, A (ITIG), 54 commercial general liability (CGL) policies, 183–184, 189 community acceptability, 13, 18–19 conceptual design reports, 17 concurrency packages, 65 ConsensusDocs, 143 consequences, 40 constraints, 107–108 constructability reviews, 64, 69, 81 Construction Dispute Review Board Manual (Matyas et al.), 169 Construction Industry Arbitration Rules and Mediation Procedures (AAA), 171 Construction Industry Institute, 165 Construction Management Association of America (CMAA), 80 construction manager at risk (CMAR), 133–134, 163–164 construction managers conflict of interest, 78–79 contingencies, 94–95 contract administration, 82–83 defined, 77 design support for, 70–72 insurance, 193–194 need for specialized, 77–78 pre-construction services, 81–82 project management, 83 quality assurance and control (QA/QC), 80–81, 83–84 recommendations, 84–85, 203 retention provisions, 124–125 safety, 84 scope of work, 81–84 selecting, 78–81 staff qualifications, 79–81 as stakeholders, 2 contingencies, 89, 94–96, 95t., 96f., 97 contractors construction qualifications, 143–145, 146 contingencies, 94 risk management responsibilities, 55t.–56t. schedules, 111–112 as stakeholders, 2 contractors’ pollution liability (CPL) insurance, 184 contracts. see also changes clause; procurement administration of by construction managers, 82–83 construction contractor qualifications, 143–145, 146 and differing site conditions (DSCs), 23–24, 25f., 34 documents, 141–143 firm fixed price, 116–117 importance of equitable, 3–4, 7 incentive clauses, 107, 124 and insurance, 188–191 law and underground construction, 130 liquidated damages clauses, 92–93, 106–107, 114, 125 overview, 128 recommendations, 145–146, 205 schedule provisions, 143 standard terms, 142–143 time of performance establishment, 93–94, 97 underground construction factors, 130–131 use of geochemical reports as, 31–36 use of the risk register in procurement, 52 cost elements of, 155–157, 161 -loading, 110, 114 use of term, 117 cost estimates alternatives analysis, 88 applications, 88–90 budgeting, 88–89, 97 conceptual design, 14, 17 construction managers, 82, 87 contingencies, 89, 94–96, 95t., 96f., 97 contract time of performance, 93–94, 97 design process, 89–90, 97 engineer’s, 88, 90, 96, 97 estimator qualifications, 91–92 impacts on, 87 independent, 70 life-cycle, 73 overview, 87–88 preliminary, 11–12, 21 Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Index preparing, 90–92 quantitative cost-risk analysis, 47–48, 48f. recommendations, 96–97, 203 tunnel projects, 60 underground construction cost factors, 92–93 course of construction insurance, 185–186 critical path method (CPM), of scheduling, 102–103, 113–114, 117, 127 cumulative impacts assessment, 14 D DC Water, 20, 73 delay events, 109–110, 153, 157–158 deliverables, design, 65–67 delivery methods. see also procurement considerations during the planning phase, 20 selecting, 136, 137t., 145 design conflict of interest, 78–79 construction support, 70–72 contingencies, 94 cost estimation, 89–90, 97 delivery methods, 59–60 development, 61–65 documents, 65–67 geotechnical reports, 67 initial, 60 ninety percent, 64 one hundred percent, 64–65, 90 operations and maintenance (O&M), 72–73 overview, 59 payment for design-build projects, 127, 128 plans, 65–66 recommendations, 74–75, 201–203 review, 67–70 sixty percent, 63–64 specifications, 66–67 thirty percent, 61–63, 62f. design engineers, 2 design services (DS) phase, 127 design services during construction (DSDC phase), 127 design-bid-build (DBB) construction managers, 84 contract documents, 141–142 215 design, 59–60 evaluation, 137t. low price procurement, 136–137 overview, 132 schedules, 102 specifications, 66 value engineering change proposal (VECP) provisions, 73 design-build (DB) best value procurement, 137, 164 construction managers, 83, 84 deliverables, 65–67 design, 59–60 evaluation, 137t. insurance, 193 overhead provisions, 159, 161 overview, 133 payment for design costs, 127, 128 progressive, 136 schedules, 102, 114 specifications, 66–67 two-phase selection, 137–138 value engineering change proposal (VECP) provisions, 73 detailed quantity takeoffs, 90–91 differing site conditions (DSCs), 23–24, 25f., 34, 151–152, 160 disclaimers, 35 discovery, 175 dispute resolution alternative (ADR) procedures, 167–174 arbitration, 173–174 boards (DRBs), 142, 167–170, 178 disputes clause, 142 escrow bid documents, 166–167, 178 litigation, 174–177 mediation, 170–172 overview, 163–164 partnering, 164–166, 178 recommendations, 177–178, 206–207 Dispute Resolution Board Foundation (DRBF), 168 E easements, 14, 16–17, 105–106 Eichleay formula, 157 employers’ liability (EL) insurance, 185 engineer-of-record (EOR), 66, 71–72, 75, 80 Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Index 216 engineers, use of term, 70, 81 Engineers Joint Contract Documents Committee (EJCDC), 143 environmental analysis, 12–14 environmental impact statements (EIS), 14 equipment rentals, 156–157, 161 EquipmentWatch, 156, 161 escalation, 92, 123–124, 128 escrow bid documents, 166–167, 178 excess policies, 184 exploration programs, 27–31 F facilitators, 165–166 feasibility studies, 11–12, 21 Federal Acquisition Regulations, 137, 159 Federal Transit Administration (FTA), 20, 78–79 fees, 158 firm fixed price contracts, 116–117 float, 111, 114 force majeure, 152–153, 160 funding, 19–20 G Gantt charts, 105 geological mapping, 71 geotechnical baseline reports (GBRs), 33–36, 64, 151–152 Geotechnical Baseline Reports for Construction: Suggested Guidelines (the “Gold Book”), 34–35 geotechnical data reports (GDRs), 32, 35–36, 61, 151 geotechnical interpretive reports (GIRs), 32–33, 61 geotechnical investigations commentary on investigation methods, 29t. subsurface investigation programs, 27–31, 35–36 Geotechnical Site Investigations for Underground Projects (USNCTT), 30 ground conditions, 11 Guidelines for Improved Risk Management on Tunnel and Underground Projects in the United States of America (GRIM), 39, 54 H Hawkins, George S., 20 I implementation plans about, 17–18 delivery considerations, 20 funding, 19–20 political and public relations issues, 18–19 In Search of Partnering Excellence (Construction Industry Institute), 165 incentives, 107, 124 indemnity agreements, 188–189, 197 independent cost estimates, 70 independent review panels (IRPs), 68 industry reviews, 70 insurance agents, 180 alliancing, 194 brokers, 180 builders’ risk (BR), 185–186 carriers, 180–181 certificates of, 190–191 commercial general liability (CGL), 183–184, 189 consolidated programs (CIPs), 194–196, 195t., 197 construction managers, 193–194 contractors’ pollution liability (CPL), 184 contractual responsibilities and, 188–191 deductibles, 190 design-build (DB) method, 193 employers’ liability (EL), 185 excess, 184 for joint ventures (JVs), 191–193, 197 liability, 186–187 overview, 179–181 performance bonds, 159–160 policies, 179 pollution legal liability (PLL), 184 practice codes, 54, 56–57 premiums, 179 professional liability, 182–183 public-private partnership (P3), 194 recommendations, 197, 207 reinsurance carriers, 181 self-insured retentions (SIRs), 190 Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Index surety bonds, 187–188 umbrella, 184 underground construction products, 181–188 workers’ compensation (WC), 185 wrap-up, 124, 194 interim milestones, 105–106, 107–108 International Tunnelling and Underground Space Association (ITA) Working Group 2, 27–28, 30, 35 International Tunnelling Insurance Group (ITIG), 54 interrogatories, 175 issue resolution/escalation ladder, 5 J Joint Code of Practice for Risk Management of Tunnel Works in the UK (BTS and ABI), 54 joint ventures (JVs), insuring, 191–193, 197 L labor escalation, 123–124 Lake Mead Intake No. 3 project, 122 law, contract, 130 liability, 186–187 linear schedules, 103, 104f. liquidated damages, 92–93, 106–107, 114, 125 litigation, 174–177 long-term value, 11–12 M margins, 158 Massachusetts Water Resources Authority (MWRA), 15 mediation, 170–172 memorandums of understanding (MOU), 16 Metropolitan Transportation Authority (MTA), 18 milestones, 105–106, 107–108 mobilization, 118–119, 127, 143, 156–157 Monte Carlo simulations, 47, 48, 49, 95, 113 multijurisdictional issues, 15 N National Environmental Policy Act of 1969 (NEPA), 14, 59 National Oceanic and Atmospheric Administration, 153 neat-line quantities, 90 needs assessments, 10–11, 21 Northside Storage Tunnel, 135 notice provisions, 149–150 notice to proceed (NTP), 108–109 O open houses, 70 operations and maintenance (O&M) design considerations, 72–73 insurance, 194 opportunities, 40 organized labor, 18–19, 21, 153 overhead, 157–159, 161 owner agencies, 2, 54, 55t.–56t. P partnering, 4–6, 7, 143, 164–166, 178 partnering facilitators, 5 payment bonds, 188 payment provisions. see pricing and payment provisions peer reviews, 69 performance bonds, 159–160, 187, 188 performance specifications, 66 permitting, 14, 15–16, 21 phantom float, 110 phased construction packages, 65 pleadings, 175 pollution legal liability (PLL) insurance, 184 Portland approach, 138 potholing, 63 preferential logic, 111 pre-purchasing, 140–141 prequalification, of construction contractors, 143–145, 146 prescriptive specifications, 66 price, use of term, 117 price proposals, 116 pricing and payment provisions A+B bidding, 126–127 balanced bids, 119, 120 changes clause, 153–155 escalation, 92, 123–124, 128 firm fixed price contracts, 116–117 front loading bids, 119–120 incentives, 107, 124 liquidated damages, 125 mobilization, 118–119, 127, 156–157 Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. 217 Index 218 overview, 115 payment issues, 118–126 philosophy of, 115–116 progress payments, 125–126 recommendations, 127–128, 204–205 retention, 124–125, 128 stored materials, 123, 128 time and materials, 122, 154, 161 unbalancing bids, 119–120 unknown quantities pricing, 120–122, 128 variation in quantity clauses, 120, 128 probability, 40 procurement. see also contracts; design-bidbuild (DBB); design-build (DB) alliancing, 4, 134–135 best value, 137, 164 Construction Manager at Risk (CMAR), 133–134 cost reimbursable, 138–139 low price, 136–137, 148–149 negotiated, 139 owner’s option to pre-purchase, 140–141 pricing methods, 136–139 of professional services, 139–140 public-private partnership (P3), 135–136 two-phase selection, 137–138 use of the risk register in, 52 professional engineers (PEs), 80 professional liability insurance, 182–183 professional services, 139–140 project definition documents, 41–42 project labor agreements (PLAs), 18–19, 21, 92 project management, 83 project methodologies, relationship-based, 4–6 project neutrals, 6 project planning alternatives analysis, 12–14, 60, 88 approvals and agreements, 14–17 conceptual design reports, 17 cost estimates, 88 feasibility studies, 11–12 goal of, 9 implementation plans, 17–20 key elements of, 9 needs assessments, 10–11 realistic schedules, 99–100 recommendations, 21, 200 roles and responsibilities, 10 project-specific professional liability (PSPL) policies, 182 property acquisitions, 14, 16–17 protective policies, 183 public, members of as stakeholders, 2, 18–19 public-private partnership (P3), 135–136, 194 Q quality assurance and control (QA/QC) construction managers, 80–81, 83–84 design, 67–68 R railroad protective liability, 187 regulatory approvals, 14 relationship contracting, 134 relationships importance of successful, 1–2, 7 improving, 4–6 recommendations, 7, 199 role of contracts in, 3–4, 7 reports, geotechnical, 31–36, 61, 67 requests for information (RFIs), 70–71 reservation of rights language, 150 residual risk, 40 resource loading, 110 retention provisions, 124–125, 128 risk, defined, 40 risk facilitators, 42 risk management. see also insurance allocation of risk, 131 change avoidance, 148–149 checklist of risks, 44t. construction managers and, 82 contingencies, 89, 94–96, 95t., 96f., 97 cost quantitative analysis, 47–48, 48f. defined, 40 and geotechnical investigations, 27 identification of risks, 42–43, 57 liquidated damages clauses, 92–93, 106–107, 114, 125 mitigation of risk, 51–52, 51t., 57 monitoring and control, 52, 53t. planning, 41–42 preliminary assessments for project planning, 10 process steps, 41 for productive project relationships, 6 qualitative risk assessment, 43–45, 45t.–46t. Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Index quantitative analysis, 47–52, 48f., 50f., 51t., 53t., 95–96, 96f. quantitative cost-risk analysis, 57 recommendations, 56–57, 201 responsibility for, 39, 51–52, 51t., 54, 55t.–56t., 57 schedule quantitative analysis, 49–51, 50f. schedules, 113 understanding risk, 40–41 use of the risk register in procurement, 52 S safety, 84 San Francisco Bay Area Rapid Transit (BART), 11, 49–51, 50f., 68 San Francisco Public Utilities Commission (SFPUC), 18 schedule of values (SOV), 116 schedules bar charts, 105 constraints, 107–108 contract provisions, 143 contractor, 111–112 cost- and resource-loaded, 110–111, 114 critical path method (CPM), 102–103, 113–114, 117, 127 float, 111, 114 forensic, 113 interim milestones, 105–106 linear, 103, 104f. liquidated damages, 92–93, 106–107, 114 look-ahead, 112 models, 102–105, 104f. overview, 99 preparation of, 101 quantitative cost-risk analysis, 57 quantitative risk analysis, 49–51, 50f. realistic, 99–100 recommendations, 113–114, 203–204 specifications, 108–110 subcontractors, 112 substantial completion, 106 underground construction needs, 101–102 scope uncertainty, 150 shortlisting, 145, 146 soft costs, 89 219 Southern Nevada Water Authority (SNWA), 122 spread, 119 staging areas, 17, 21 stakeholders, 2, 5, 43, 99 standards CI/ASCE 38-02, 63, 74 design-build (DB), 60 geologic nomenclature and terminology, 28 geotechnical investigations, 27 strict waiver rule, 149 subcontractors, 112 sublimits, insurance, 186 subrogation, 189 substantial completion, 106 subsurface conditions importance of comprehensive investigations, 24–27, 25f.–26f., 35 importance of reliable knowledge about, 23–24, 35 investigation program implementation, 27–31 recommendations, 35–36, 200–201 summary judgement, 175, 177 supplies, 156 surety bonds, 187–188 Sydney Water, 135 T technical feasibility, 11 technical review panels, 68 terrorism insurance, 187 third-party agreements, 16 third-party practice, 175 third-party reviews, 64–65, 68 time constraints, 150 Tren Urbano Project, San Juan, Puerto Rico, 18 trials, 175–176 tunnel boring machines (TBMs), 93, 140–141, 186 U umbrella policies, 184 uncertainty, 40, 57 Underground Technology Research Council (UTRC), 168–169 Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Index 220 union labor, 18–19, 21, 153 unit price method, 117, 122 U.S. Army Corps of Engineers, 83–84, 156, 161 U.S. Bureau of Reclamation (USBR), 30 U.S. Department of Energy, 94, 95t. U.S. National Committee on Tunneling Technology (USNCTT), 24–27, 25f.–26f., 30, 33, 35, 88, 95, 132 utility relocation, 62–63, 74 V value engineering, 69 change proposal (VECP) provisions, 73, 76 W warranties, 35 watercraft liability, 187 weather delays, 109–110, 153 workers’ compensation (WC) insurance, 185 working drawings, 72, 74 Copyright © 2019 Society for Mining, Metallurgy & Exploration. All rights reserved. Recommended Contract Practices for Underground Construction Second Edition Edited by Sarah H. Wilson Gain a better understanding of the specialized nature of contracts for the underground industry. A successful underground project is one where relationships are strong, the objectives as understood by each party are met or exceeded, and the work product serves its stakeholders and is maintainable in a way that fits with the project vision. High-level metrics for project success relate to safety, quality, schedule, and budget. Chapters Include – Relationships Project Planning Subsurface Conditions Risk Management Design Construction Management Cost Estimates Schedules Pricing & Payment Provisions Contracts Changes Dispute Resolution Insurance Summary of Recommendations The first edition of Recommended Contract Practices for Underground Construction has become a valued resource for the underground industry, serving as a concise guide for drafting and implementation of contract provisions. It provided improvements to underground contracting practices during all project stages. It also presented clear roles and responsibilities for project participants to promote better contracts. This second edition was undertaken by the UCA of SME because the industry has undergone numerous changes over the last decade. Changes in tunneling technology, more common use of design-build as a contracting mechanism, and many lessons learned have sparked some creative contract approaches. The recommendations contained in this edition are intended to guide owners and their engineers in developing and administering contracts and to give contractors a better understanding of the rationale behind contract provisions. The goal is that more underground projects in this country can be best projects, where improved relationships and fair contracts enable all project participants to personally invest in cost-effective, profitable projects, ensuring the continued health of the underground industry. The Society for Mining, Metallurgy & Exploration (SME) is a professional society whose members include engineers, geologists, metallurgists, educators, students, and researchers. SME advances the worldwide mining and underground construction community though information exchange and professional development.

Underground Construction Contract Practices Guide

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