Earlier this year, the ACEC Research Institute commissioned a study of lump sum contracting. Led by Virginia Tech engineering professor Dr. Michael Garvin, this study sought to identify the opportunities and challenges presented by these types of contracts. Institute Chair Mike Carragher and Senior Research Consultant Kevin McMahon shared some of the study’s early findings at ACEC’s Annual Convention & Legislative Summit in May.
Increased efficiencies for design services
Incentive for consultants to control costs
Reduced time and cost of invoicing
Greater focus on product/deliverable rather than administration and invoicing
Better alignment on scope and price due to early dialogue and negotiations
The predominant contracting methodology in procuring engineering services on large public transportation services is cost plus fixed fee (CPFF). This methodology utilizes a detailed scope of services, specifying task hours, types of technical personnel needed, expected time frames, and estimated expenses, and typically requires a large administrative and auditing burden by clients to verify. In contrast, the use of lump sum requires an agreement of scope of services between the client and engineering firm, but allows for more staff flexibility and less administrative burden by clients. The focus and effort shifts to the deliverable rather than the process.
“The ACEC Research Institute acknowledges the impact of technology and AI on a firm’s ability to more effectively execute projects,” stated Carragher, who’s also on the ACEC Research Institute Board of Directors. “We believe lump sum or value-based contracting will continue to grow in importance to our industry’s business model considerations, and therefore this study was initiated to help both clients and firms understand current practices and identify opportunities for wider implementation.”
Representatives from 14 state and federal client organizations and senior leaders from nine engineering firms of all sizes with broad geographic coverage were interviewed for the study. Both the private and public sector interviewees averaged more than two decades of experience. Participants were asked how often they use lump sum contracting. On the client organization side, 20 percent of respondents indicated at least moderate use (25 percent to 50 percent of contracts). Forty percent of respondents indicated extensive use (more than 80 percent of contracts—using lump sum contracts as the rule, rather than the exception). The remaining 40 percent indicated limited use of lump sum arrangements (fewer than 10 percent of contracts).
Of the firms surveyed, Garvin found that lump sum contracts compose anywhere from 20 percent to 80 percent of those firms’ business. He noted that the percentage was “very dependent on firm size, regions served, and client types.”
That said, all interviewees indicated that lump sum contracts are appropriate when the scope of work is clear and well-defined. As the engineering and design services industry continues to navigate workforce shortages, lump sum contracts can be useful in allowing firms to deploy limited human resources on an as-needed basis. Said one interviewee: “Lump sum allows you to bring in and utilize whatever workforce you have available. Shift the resources to meet the project, particularly the project schedule, because resources always affect that.”
When asked what types of services are suitable for lump sum contracts, participants agreed that resurfacing, rehabilitation, and restoration projects, as well as interchange/intersection improvements, bridge inspection, and culvert replacement, are all good candidates, while more complex projects with “unknown unknowns” are unsuitable. Projects requiring significant engagement with third parties and those with complex maintenance of traffic are also not good candidates for lump sum.
What was clear in the responses on both sides of the lump sum question is that artificial intelligence (AI) and other emerging technologies will play a decisive role in how contracts will be executed going forward, replacing some effort of hours currently deployed to the project. "AI is going to change the game," Garvin says.
It remains an unsettled question what that changed landscape will mean to the engineering industry as a whole. But on lump sum contracting, there is opportunity in that uncertainty.
“We all have to figure out how to address the AI component of engineering services,” said one respondent. “Lump sum seems to be a very good solution to address the commercial arrangement as we move into AI type delivery. There’s still human intervention in this. Somebody still has to select, somebody still is going to come up with ideas that haven’t been thought of. And that’s where the real value [for engineering firms] gets created.”
Visit the Institute’s website, www.acecresearchinstitute.org, for the full report.