New contract type offers incentives to contractor and owner

A utility company in New Jersey has completed a large water main project using an unusual type of contract that provides incentives to both the utility and the contractor for achieving time and cost targets.

According to David Thomas, capital program director for Elizabethtown Water, the utility
was looking “not only at financial considerations but for the best project approach.” Each of seven contractors selected discussed the project and scheduling, plant, labor and material rates, markups and a “target cost.” Elizabethtown Water awarded the contract to Morristown-based Spiniello Companies.

The target price/cost reimbursable contract takes both timeliness and cost into account. If the actual cost of the project turns out to be less than the targeted cost, the difference or gain is shared between the utility and the contractor. If the actual cost is greater than the target, the additional amount is shared, too.

The project involved the installation of 17,000 feet of mostly 72-inch pipeline at a depth of up to 20 feet. Elizabethtown Water, Spiniello Companies and Killam Associates, the engineering consultants, elected to share a common office onsite, allowing changes, drawings and decisions to be made immediately.

Gary Stivaly, president of Spiniello Companies, said the time the company saved with this setup created major cost savings.

“All the high-level decision-makers and project managers worked together, often in the same room,” said Robert De Ponte, vice president and director of field operations for Spiniello. “A decision that might have taken weeks of letter writing elsewhere was frequently made here in 10 minutes. ”

Under the target price/cost reimbursable contract, the contractor never has to bankroll huge portions of the project. Instead, each month Spiniello submitted detailed proof of the previous month’s expenses along with an estimate of the costs it expected to incur in the coming month. Elizabethtown Water then reimbursed the company for costs plus a markup for overhead and profit. In subsequent months, previous estimates were “trued up” with actual costs.

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The project moved along so well the utility decided to expand it to clean and line 45,000 feet of smaller water main that intersected the new pipeline.

Spiniello workers cleaned out the tuberculation built up over the years and then lined the pipes using a concrete mortar lining process, improving efficiency, flow and water quality.

The pipelines are now in use. And because everything was finished on time, the utility and the contractor shared equally in the total cost savings: a 3.3 percent savings on construction, and a 10.7 percent savings on the cleaning and lining work.

“The level of partnering was unique in our experience,” Stivalty said. “We made several suggestions about installation methods, and the owner and engineers were receptive. In general, we had no real disputes, problems tended to be solved quickly, and considerable savings were realized.”

Thames Water, a British firm with 42 million customers worldwide, bought Elizabethtown Water in December 2000. Drawing on his previous experience with Thames Water, Thomas decided to implement the targeted contract arrangement.