Development of a Biennial Review Procedure for Updating Liquidated Damage Rates Used in Construction Contracts

Abstract

This research effort sought to develop statistically justifiable means for developing a schedule of liquidated damage (LD) rates to be adopted by the Alabama Department of Transportation (ALDOT). The procedure outlined is to be used biennially to update the LD rates found in ALDOTs standard specifications for highway construction contracts, since their current schedule and review procedure has come under legal scrutiny. After a review of pertinent literature on the subject, it was determined that there was lack of documentation concerning State Highway Agencies (SHAs) use of LDs. As a result, an electronic survey was created and sent out to all SHAs to determine the state-of-the-practice regarding the use of LDs by SHAs in construction contracts. This survey experienced a 100% response rate. Using the knowledge obtained from the survey, two statistically justifiable methodologies were developed to calculate LD rates using historical project cost accounting data: i.) a traditional LDs provision based on FHWA guidelines with the LD rates stipulated in a table as a function of the contract value, and ii.) a more complex table in which the LDs rates are categorized by contract value as well as by project type (i.e. bridge, road, building, etc.). These methods were then compared to the current ALDOT procedure. The first methodology which stipulates LD rates in a table by contract value was determined to be the most robust method. The project type method successfully stipulated LDs by both contract value and project type, but assumptions had to be made concerning the project type designations in the historical project data, introducing bias to the procedure weakening its objectivity. The final product of this research effort is a set of stepwise guidelines for practitioners to utilize on a biennially basis to update their schedule of LD rates. Future research stemming from this effort could develop a standardized method for determining LDs on a project specific basis allowing for the incorporation of road user costs; and a more detailed policy for the FHWA to use in providing guidance to SHAs in development of their LDs policy.