CHAPTER XV

PROPOSAL-LETTERS AND GENERAL CONTRACTS

1. Types of Proposal-Letters. The form in which an estimate is presented to the owner, architect, or engineer by the general contractor, usually falls under one of three classifications. These may be defined as proposals which offer to perform the work for a LUMP SUM, for COST-PLUS-A-COMMISSION, or for costPLUS-A-FIXED-FEE, the last often combined with a guaranteed limiting cost, or a PROFIT-AND-LOSS-SHARING SCHEME, based upon a mutually acceptable estimate. For public work and occasionally for private enterprises the skeleton form of proposal-letter is incorporated in the specifications. In most cases, however, it devolves upon the contractor to properly express the terms of his offer, when advised by the owner, or his representative, as to the form of proposal he prefers.

Even when the drawings and specifications are substantially complete at the time of the estimate, the work is seldom so clearly described that there is no doubt as to their interpretation. There are also many important details which do not affect the character or scope of the work, and are consequently not appropriate to include in the specifications, but which may MATERIALLY AFFECT THE COST of the operation and consequently the obligation assumed by the contractor. It would be obviously impossible to make a complete list of all the details to be included in a proposal-letter for any particular undertaking; but the following paragraphs illustrate the type of subjects to be considered in connection with reinforced-concrete construction.

2. Interpretation of Plans and Specifications. The foundation for a precise proposal should be laid by the Estimator in the form of a BRIEF SERIES OF NOTES calling attention to any ambiguity, or the omission of details obviously necessary to fulfill the general intent of the plans and specifications. These matters are very important, especially in concrete construction, as they may affect the structural design of a building which is usually specified to conform to the requirements of a certain code or ruling, and may not be fully designed at the time of estimate. Having computed the probable cost of the work based upon a REASONABLE INTERPRETATION of the information available, these points may be summarized in the proposal letter by a paragraph expressed as follows: "Your specifications call for We believe that you require.

Our proposal is based on

When the estimate is made from architectural plans upon which only the APPROXIMATE SIZES of structural members are indicated, the proposal should include a brief statement describing the estimated design, and covering those points in regard to which general practice is not uniform. Most building organizations also have their own individual practice in regard to the construc

tion, the number of uses, and the time of removal of forms. The specifications should be, and often are explicit in regard to these points, and may or may not conform to the contractor's established custom. In the latter case, such require

ments may increase the cost of the work unless the contractor can obtain permission from the owner's representative to follow his USUAL PRACTICE, which concession should be confirmed by including a statement to that effect in the

PROPOSAL.

The assumed BEARING CAPACITY OF THE SOIL, OR PILES, is another matter which should be determined as accurately as possible at the time of making the estimate, after which the matter may be treated as follows: "We assume that soil capable of carrying .... tons per square foot will be found immediately below the basement floor where the basement occurs, and elsewhere at a depth of ..... feet below grade." Under conditions where it is necessary to have recourse to boring records in order to determine the depth to which foundations will, presumably, have to be carried, the assumed bearing-capacity of the rock or other material at the indicated depths should also be stated.

In regard to EXCAVATION there is seldom any ambiguity in the definition of what constitutes rock, but the specifications are often inexplicit in regard to the allowances to be made if old MASONRY-FOUNDATIONS, TIMBER-RAFTS, PIPES, CONDUITS, WATER, QUICK-SAND, ETC., are encountered. A careful inspection of the site, aided by test-pits and wash or core-borings, is usually adequate to determine sub-soil conditions, but where reasonable doubt exists the BASIS UPON WHICH THE COST IS COMPUTED should be noted in the proposal letter.

3. Working Conditions. When an estimate is tendered in the belief that the contract will be promptly awarded to the successful bidder, and the work proceed immediately, this fact should be expressed in the proposal letters by placing a time-limit upon the validity of the bid in order that the contemplated WORKING CONDITIONS, MATERIAL PRICES, and SUB-CONTRACT FIGURES may be assured. In cases where the form of agreement, and the general conditions of the contract are not submitted to the bidders at the time when the estimates are requested, the proposal should be made subject to MUTUAL AGREEMENT in regard to these matters. When it is necessary for PRELIMINARY WORK to be done upon the site by the owner, or other contractor, before it is possible for the proposed work to proceed, a statement should be made similar to the following: "It will be necessary for wrecking and removal of rubbish to be completed by and any expense due to cold weather, or other cause resulting from delay beyond that date, is not included in this proposal."

It often occurs that certain parts of the construction, such as the MECHANICAL INSTALLATIONS, are not a part of the general contract. When this condition exists it should receive special consideration in the general articles of the contract, but the matter of LOCATING ALL OPENINGS AND CHASES PRIOR TO POURING THE CONCRETE is such an important matter in reinforced-concrete buildings that it should be stated as a contingency of the proposal unless an allowance is made in the estimate for CUTTING AND PATCHING.

4. Owners' Estimates. In order to provide a BASIS OF VALUATION for determining the amounts of PERIODIC PAYMENTS, or for adjustments of cost in

the case of fixed-fee contracts, it is sometimes required that the contractor furnish the owner, or his representative, at the time of signing the contract, a detailed estimate of the cost of the work.

Such an estimate, in order to be of value, must include a list of quantities with unit-prices extended to the various totals for each type of work and summing up, with the sub-contracts, to the total amount of the contract-price. Each item should be complete in itself, that is, include its own proportional share of the overhead and profit, except where the latter is in the form of a fee or commission stipulated in the contract, in which case it should appear as a separate entry. When such an estimate is furnished, however, it should be understood that the UNIT PRICES ARE BASED UPON THE QUANTITY AS WELL AS THE CHARACTER of each portion of the work and that the same units would not necessarily apply to changes involving comparatively small additions. Similarly, a reduction in quantity could not be expected, except under certain conditions, to warrant a prorata reduction in price, owing to the fixed-charges of plant, superintendence, etc. 5. Classification of General Contracts. The three types of contracts most widely used are differentiated according to the basis of the contractor's remuneration and known as the LUMP-SUM, COST-PLUS-A-COMMISSION, and In the first, the contractor binds himself to perform

COST-PLUS-A-FIXED-FEE.

the work for a STIPULATED SUM of money, and his PROFIT OR LOSS is the difference between this figure and the cost to him. In the second, the contractor furnishes the services of his organization for a COMMISSION computed as a percentage of the cost of the work; both commission and cost are paid by the owner. The third type of agreement, in its simplest form, replaces the contractor's commission by A FIXED FEE, and is entirely similar to the cost-plus-a-commission contract, except that the fee does not vary with the cost of the work. As a modification of this form, a guaranteed limiting-cost is sometimes stipulated beyond which the entire cost must be borne by the contractor. A fairer arrangement, however, is one by which both owner and contractor share in the profit or loss of the undertaking. Having agreed upon a reasonable estimate of the cost of the work, a fixed fee is determined, usually as a percentage of the estimate, varying from 6 to 10%, according to circumstances. A TOTAL FIGURE is thus established by adding the estimated cost to the commission, with or without a contingency allowance, depending upon conditions, and the total taken as a limit of cost, any excess over which is shared by both owner and contractor, if the actual cost of the work, plus the contractor's fee, is less than the limitingamount, the saving is similarly shared.

or

This form of agreement makes the contractor's remuneration largely dependent upon the EFFICIENT CONDUCT of the job and, at the same time, relieves him of at least a portion of the financial risk, which should result in the limiting cost being considerably less than the amount of a lump-sum bid. Furthermore, as the job progresses, the INTEREST OF BOTH OWNER AND CONTRACTOR ARE AT ALL TIMES IDENTICAL whether the cost of the operation is gaining or losing upon the estimated cost.

6. The Contract Documents. The contract documents include the AGREEMENT between the contractor and owner, the GENERAL CONDITIONS of the con

tract, and the DRAWINGS and SPECIFICATIONS. Except where the forms recommended by the American Institute of Architects are used, the agreement is usually combined with certain, or all, of the general conditions and both loosely referred to as the CONTRACT. The AGREEMENT, in either case, whether written as a separate document, or combined with the general conditions, is of a purely legal nature. The general conditions describe, as far as possible, the complete triangular relationship between the owner, the architect, and the contractor, with the technical details of their mutual responsibilities.

As a basis for the articles comprising the GENERAL CONDITIONS OF THE CONTRACT, the document published under that name by the American Institute of Architects and reprinted herein is, without doubt, the most widely accepted. This form has been developed as the result of many years of constructive criticism and, in conjunction with the standard form of agreement (page 405), can be applied to lump-sum jobs or, with the required changes, can be used with the appropriate agreement for other forms of contracts. These modifications, required in the case of work other than that executed for a stipulated sum, are principally concerned with the basis and method of payment, and with the changes indicated in the articles under these headings the general form as given on pages 411 to 420 can be applied to COMMISSION OR FIXED FEE CONTRACTS. 7. Basis of Payment. As noted under Paragraph 5, above, the basis of payment may be taken as a stipulated-sum, cost-plus-a-commission, or cost. plus-a-fixed-fee.

In the first case, the sum to be paid by the owner to the contractor, except as affected by subsequent changes in the work, penalties or bonuses, is FIXED AT A DEFINITE FIGURE by the terms of the contract. In the two latter cases, it is necessary to fix the contractor's fee or commission and to clearly define the so-called cost of the work, which is also to be paid by the owner. In regard to the items which, under this designation, are charged to the owner, there is no uniform practice. In general, ALL ITEMS OF MATERIAL AND LABOR USED IN THE INTEREST OF, OR ENTERING INTO THE CONSTRUCTION OF THE WORK, should be included as cost, and this may or may not be interpreted in the contract to include plant rental charges together with the services of the contractor's staff in preparing shop drawings, purchasing materials, accounting, and cost-accounting. The items which it is desired to include should, in any case, be fully detailed in the contract.

In work for which the contractor receives as his remuneration a PERCENTAGE OF THE COST, the commission is computed as a simple percentage of the cost of the work as defined above, with any modifications that may result from other stipulations in the contract. For additions or subtractions to the work as originally contemplated AUTHORIZATION ONLY is required, as the commission computed upon the total cost naturally varies with the amount of work involved. When the contractor's remuneration is in the form of a fixed-fee, it is necessary to include an article covering the effect of changes on the fee, which is usually stipulated to be increased or decreased in the same proportion as the estimate for the change, approved by the architect or engineer, increases or decreases the original estimate, exclusive of the contractor's fee. Under this condition, it is

necessary for the contractor to obtain an APPROVAL OF THE ESTIMATED COST of the change, or of a method by which the cost can be determined, as well as

AUTHORITY FOR EXECUTING THE WORK.

When the contract is made upon a cost-plus-a-fixed fee basis, but includes a GUARANTEED LIMIT, the cost of the change is added to the cost of the work, as previously determined, and the additional fee, computed as above, to the contractor's remuneration. In contracts employing a PROFIT-SHARING SCHEME the contractor's remuneration is determined as a percentage of an approved estimate and this is increased, or diminished, in the event of the cost of the work being less, or more, than the estimated cost. This arrangement can be expressed as follows:

..........

"The contractor has estimated the total cost to the owner of completing the work, according to the drawings and specifications, and including the contractor's fee, at .... dollars. This sum, increased or decreased as herein provided, shall be known as the limiting cost, and if the actual cost of the work as previously defined, plus the contractor's fee, exceeds this sum, the contractor shall pay out of his own funds ..... ..% of such excess. Should the actual cost of the work, plus the contractor's fee, be less than the limiting cost, the owner shall pay the contractor as an additional fee an amount equal to ......% of the difference between the limiting cost and the actual cost plus the contractor's fee." Under such forms of contract it is also necessary to obtain APPROVAL OF THE COST as well as authorization for all alterations made during the progress of the work.

8. Method of Payment. By contracts in which a stipulated sum forms the basis of payment the contractor is usually required to submit a SCHEDULE giving his estimate of the costs of the various portions of the work which estimate, when approved by the architect or engineer, is used in determining the amounts of the PERIODIC PAYMENTS. Another method that is sometimes used is the payment of certain proportions of the contract-price at different stages of the work. On COMMISSION AND FIXED-FEE CONTRACTS, it is usually customary for the contractor to submit, periodically, to the architect or engineer, a STATEMENT OF DISBURSEMENTS made during the preceding period, covered by certified payrolls, copies of paid invoices, and other miscellaneous vouchers. These expenditures are then paid by the owner, together with a proportional amount of the contractor's fee. As, in this type of contract, any saving in the cost of the work reverts to the owner, it is sometimes stipulated that he shall deposit with the contractor a sum of money to be applied to the prompt payment of material invoices in order that he may profit by trade discounts. Another system sometimes employed, is to base the payments to the contractor upon his approved estimate of expenditures for the forthcoming period. The contractor is then required to furnish satisfactory evidence that the funds previously advanced to him have been properly disbursed and is also required to take advantage of all trade discounts.

9. Supplementary Articles for Cost Plus-a-Fee and Commission Contracts. Under these forms of agreement, the contractor may assume various degrees of financial responsibility. His position may be that of a PROFESSIONAL