Payment plans

February 2012 » Features » BUSINESS STRATEGIES
The measurement and payment section of a contract requires special attention to ensure project success.
Frederick G. Aufiero, P.E.

An engineering firm has completed its project design and assembled its quantity and cost estimates. To ensure a successful construction phase, there must be carefully prepared construction drawings and specifications to guide the contractor's work. These describe the work to be done and represent the technical side of the construction documents. The other critical parts of the construction documents are contractual: general and special conditions, contract forms, the bid form, bonds and insurance requirements, and any other requirements specific to the project.

The measurement and payment section, usually contained in division one of the 16-part CSI specification format, is one of the most important elements of the contract documents. This section ties the project's technical side to its contractual side. The measurement and payment section's accuracy and completeness is critical to the project's success.

The measurement and payment section defines how the contractor will be paid for the work. It will affect the contractor's cash flow and how work on the project is structured. This section also represents risk for the owner because ambiguity or inaccuracy in any measurement and payment item description creates potential for contractor claims —€” for extra time, extra cost, or both. It's essential that the payment item descriptions reference all work elements to be paid for under that item and identify work elements specifically not paid for under that item. Also, the section must coordinate all payment items with each other to avoid gaps and overlaps of payment elements.

Elements of a measurement and payment item
A well-written measurement and payment item should:

  • contain a clear description of what the item includes and does not include;
  • cite other payment items that relate to this one;
  • allow the contractor to measure and price it accurately;
  • describe the units of measurement; and
  • match the description of the payment item in the bid form or other contractual payment vehicle.

Depending on the type of construction project, the measurement and payment items could use one or more payment type, which typically includes lump sum, unit price, and allowances. It must be decided which measurement approach is needed for each payment item. For example, if the project consists of a single-story distribution warehouse on a relatively flat site, it would be possible to bid the entire project as a lump sum. All of the construction elements should be clearly definable in the plans and specifications, which may lessen the need for contingency items.

In other cases, such as rehabilitation of a wastewater treatment facility involving both new structures and the rehabilitation of existing structures, the measurement and payment items are likely to be more complex. They would likely involve a combination of lump sum and unit price items with possibly some allowance items. For example, a new structure to house treatment equipment that is clearly definable could be bid as a lump sum. Rehabilitation of concrete tankage that is less well-defined and subject to field conditions could benefit from a unit price approach. Allowance items might be necessary for equipment purchases or owner-supplied items.

As you can see, developing measurement and payment items is not a case of one size fits all. The items need to be appropriate for each unique project and its type of construction work. Careful analysis of the type of work involved with an eye toward the most appropriate way to pay for the work serves as a risk-management activity on behalf of the project owner. Performing this function in a thoughtful, careful manner can significantly reduce the potential for contractor claims due to either inaccurate language or poor measurement and payment items.

Challenging areas
The following areas can present challenges in preparing measurement and payment items:

Dewatering —€” Most construction projects require some type of dewatering system to control the groundwater level during construction. To pay for dewatering, the contract can establish a separate bid item for it with its own measurement and payment item or include dewatering with various other bid items. For example, utility contracts often include dewatering in payment items for installing the utility in the ground, rather than having a separate bid item for dewatering. The contractor must determine the anticipated dewatering costs and include them as part of its price for installing the utility.

Another example: A unique combination of soil conditions and fluctuating groundwater levels could occur during the construction period. In this case, a separate bid item for dewatering can place the responsibility for developing the dewatering plan, and therefore its cost, on the contractor. This can possibly include some contingency elements to account for varying field conditions. In this type of complex setting, a separate bid item would be fair to both the contractor and the owner, and could reduce the potential for claims for extra cost.

Contaminated soil or groundwater —€” During the last 20 years, dealing with contaminated soils on construction sites has become routine because of past site use or even naturally occurring conditions. Today, stringent environmental regulations require careful attention to managing and disposing of contaminated soils and protecting groundwater. This is a complex area technically; therefore, the bid items and the measurement and payment item descriptions need to be appropriate to that level of complexity.

For example, if the subsurface investigation program clearly defines the quantity of contaminated soil, then one might include the cost for management and disposal of contaminated soil in other bid items, such as excavation. If the quantity of contaminated soil is not clearly identifiable prior to construction activity, then one might include a unit price item, either for excavation and disposal of contaminated soil or for just the disposal. Either approach, or a variation on them, needs to be well thought out and clearly stated in both the technical specifications and the measurement and payment items.

Ledge and rock removal —€” Another common element of many construction projects is ledge and rock removal. The challenge here is to define clearly in the technical specification what constitutes removal paid for separately from earth excavation. The nature of the ledge or rock encountered or the size of boulders may define what constitutes rock as opposed to earth excavation. The different equipment that ledge or rock removal requires, as distinct from that needed for earth, usually defines this type of excavation. Another challenge lies in acquiring an accurate assessment of the amount of rock or ledge excavation required. The subsurface exploration program and the number of borings or probings taken to determine the ledge surface profile determines this.

Integrated systems —€” Integrated systems can include architectural elements, equipment systems, or any other combination of items for which the owner wants single-source responsibility. For example, a building with a separate curtain wall installed on a steel frame may include a number of elements for the curtain wall system that are supplied by various manufacturers. However, having a single-source responsibility for the installation and soundness of the system may be most appropriate. In that case, describing all of the elements to be included in the integrated system is crucial for bidding and responsibility purposes. The measurement and payment item must clearly identify every piece, such as steel frames or glazing, and identify adjacent parts of the structure not included in the integrated system item.

Mechanical and electrical systems —€” An area that often presents the opportunity for contractor claims is the coordination of mechanical and electrical systems. Mechanical equipment includes all types, such as HVAC systems, pumping systems, or any equipment that requires electrical power. If these systems are not part of a lump sum for the whole building, the measurement and payment items must clearly identify the responsibilities of the mechanical contractor and the electrical contractor, leaving no gaps between the two systems. This issue can be exacerbated by subcontractor involvement discussed in the next paragraph.

Public-sector bidding requirements —€” In the realm of public construction, various governmental agencies have their own bidding requirements, often related to general contractor versus subcontractor work. For example, the Massachusetts "filed sub-bid law" requires that various trades —€” such as masonry, miscellaneous metals, electrical, and plumbing —€” be bid separately by the subcontractors. Then the general contractors will select whom to carry in their general bid from the bidders in the various trades. This added complexity requires attention when defining the payment items, as well as preparing the plans and specifications specifically for each filed sub-bid section. Any separate bidding, other than the general bid, adds a level of complexity (risk) which must be carried through to measurement and payment item preparation.

A well-thought out approach
The bid form and the accompanying measurement and payment items must be appropriate to the nature of the work and provide a fair set of bid items on which the contractor can base its bid. The same level of quality control and management should be given to this part of the construction documents as to the plans and specifications. A well thought-out approach to the measurement and payment items can substantially reduce the project owner's risk and provide a fair payment structure for the contractor, which is in everybody's best interest.

Frederick Aufiero, P.E., is owner of Aufiero Engineering & Consulting LLC and was formerly the vice president of Kleinfelder's risk management/expert witness/litigation support practice. He can be reached at fga@verizon.net. Tom Walsh is vice president, assistant general counsel at Kleinfelder. He can be reached at twalsh@kleinfelder.com.


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