Introduction

Well, it’s been a little while but I though now was as good a time as any to jump back into the blog-o-sphere.  Like everyone else I’m in a design office, the work isn’t too bad despite having to do all my calculations in strange units of measurement such as inch-kips and force-lbs; which means that I don’t really have any idea what answers I’m expecting to get.  No change there then!

I’m still working for USACE, but the commercial environment is like something halfway between a commercial company and a non-profit government organization [sic].  I’ll do my best to outline some of the budgeting and funding principles below:

The Military Design Branch (where I’m now based) is an arm of USACE that essentially carries out design work on behalf of the Baltimore District.  Despite being a Corps of the US Army, USACE are not entirely publicly funded, and are required to cover their own overheads (including wages) by charging a fee for their services on any projects undertaken.  Legislation prevents the military from making a profit; however this arrangement means that the organisation is run somewhat like a business, with Districts required to break-even within a 1% margin.  Performance (profit) is reported up the chain, with Divisional Commanders having the authority to support under-performing areas.  Commanders are therefore required to effectively manage income and expenditure whilst aiming to hit the 1% profit target, after which any profit achieved (over 1%) are returned to the US Treasury.

MILCON Program.

The MILCON program is funded directly by the Senate, with budgets set on an annual basis according to performance, budget, program progress and projected work.  All USACE costs associated with the planning, management and design of projects is taken directly from this source.  There is therefore only a finite amount of work that districts can pursue, and it is usually delegated to divisional chiefs to determine which work/projects they wish to undertake according to the resources available to them.  However, the final decision remains with the District Commander.  Any remaining MILCON program work will then be sub-contracted out to commercial Consulting Engineers (I did an outline design for a one-storey VCP before being told it had been put out to tender!).  The direct result of this arrangement is that clients operating within the MILCON framework have no direct say in who conducts the planning, design and management of their own projects, which is often determined by the capacity of the local USACE district office.

Construction Funding

The Senate annually funds the MILCON program, however these finances exclude the costs associated with new construction projects or renovations, instead clients apply directly to the Senate for these projects.  A formal bid process is initiated approximately two years prior to the anticipated project start date, whereby project scope and justifications are submitted and the bid is accessed against pre-determined government metrics.  If approved, funds are released directly to the client, and used to cover construction costs (e.g. the JOC project).  As previously, this means that the client generally has a choice as to which organisation will ultimately administer their own construction contract, however USACE are generally ‘chosen’ because of their reputation and specialist knowledge.  In order for USACE to then meet the overhead and wage liabilities of the project delivery team a ‘supervision and administration’ fee is then charged back to the client.  These fees are generally charged at a standard rate of 5.7%.  As a hedge against poor performance by the contractor or unforeseen events/variations USACE will also typically also apply a 5% contingency value to the overall construction cost, as per the diagram below.

Contract Relationships

A fixed price contract model is employed on all Government projects, and the client is legally obliged to compensate USACE for all work conducted.  However, at the outset of any project a one-off contract is negotiated which includes rates and fees for all design costs, management, profit and overheads.  Contract ‘variations’ however are always subject to inter-party negotiation, which due to their uniqueness and un-foreseeability are not agreed prior to the commencement of work.  Disputes or claims that arise from variations can and are still subject to legal proceedings and/or arbitration.  However, the Government’s policy of ‘fair and reasonable’ treatment generally ensures that most of the Principal Contractor’s disputes are settled prior to reaching court.  This policy can benefit both parties, however first-hand experience has demonstrated a willingness for the Government to concede positions to the Principal Contractor that they could reasonably have argued and won.  My observations were that the Contractor usually came off better because they threw the toys the furthest!