Setting Maximum Incentive for Incentive/Disincentive Contracts for Highway Projects

Abstract

An increasing number of State Highway Agencies (SHAs) are utilizing Incentive/Disincentive (I/D) bidding for highway construction. The I/D bidding concept is designed to shorten the total contract time by giving the contractor an incentive for early completion and a disincentive for late completion of a project. SHAs are then presented with the problem of determining the maximum incentive that may be awarded to the contractor. This maximum incentive amount is affected by construction cost, time, and the incentive/disincentive formula. Many SHAs use a fixed amount or fixed percent of construction cost as a maximum incentive amount. However, overestimation of the maximum incentive amount may waste public money and underestimation will reduce the effectiveness of the incentive. This research offers a quantifying model to determine a reasonable maximum incentive amount and uses projects from the Florida Department of Transportation (FDOT) to illustrate this model that is only suitable for linear I/D. A functional relationship between the construction cost and time duration is developed from the FDOT’s data. The curve with the functional relationship between the construction cost and time duration is then combined with the incentive/disincentive line to determine the optimum maximum days for incentive and incentive amount. Finally, several projects completed by the FDOT will be used to illustrate the validity of this model.