Construction Engineering 221 QUIZ #1 10 Minutes Construction Engineering 221

Construction Engineering 221 Construction Contracts

Construction Contract Types What are the two main divisions of construction contracts? Construction Engineering 221

Construction Engineering 221 First Main Division Competitive bid contracts Lump-sum Unit-price Competitive bid contracts are usually set up on a fixed-price basis. Both lump-sum and unit-price are fixed-price contracts. What is a lump-sum contract and where is it used? Cost amount is a fixed sum that covers all aspects of the work described. All public work and most private work falls into this category Where is the work described? In the bid documents. What are the bid documents? The plans and specifications What if cost of the project goes over the agreed lump-sum contract – Who pays for it? General Contractor (fired or unsuccessful – produce poor estimates or not manage a project well) What are the bid documents called after the owner has contracted with a General Contractor? What is another name for a General Contractor? Contract documents Prime Contractor What is a unit-price contract and where is it used? Estimated quantities of specified work items and a unit price for each Engineering projects such as piling or excavations -- on projects where quantities of work cannot be accurately forecasted prior to the bid letting or negotiations – often used in road construction. Why is it hard to estimate piling construction? Who estimates the quantities? Owner or AE When is there a determination of final cost with unit-price contact? At the end of the project. Construction Engineering 221

Construction Engineering 221 Second Main Division Negotiated contracts Lump-sum Unit-price Cost-plus-fee (most common w/ negotiated) When is a cost-plus-fee used in the construction industry? When the project need to get started before the plans can be completed - also known as a “fast-track” project Does the owner know the total cost of the project in the beginning? No, final cost will not be known until project is compete Scope contract and target estimate -- What are they and how do they relate to a cost-plus-fee contract? Scope contract based on preliminary drawings & outline specifications Target estimate – based on scope contract. Construction Engineering 221

Award of Competitive-Bid Contract Award contract to the “lowest responsible bidder” What is meant by the term “lowest responsible bidder”? Lowest bidder whose offer best responds in quality, fitness and capacity to fulfill the particular requirements of the proposed work and with the necessary qualifications to complete the job in accordance with the terms of the contract. In open competitive bidding by public and private owners the bid will go to the lowest responsible bidder. Bidder are normally prequalified to bid on the job. AE may set up criteria to be submitted and examined and then determine a list of bidders that will be invited to bid (private jobs) Bidding is open to all contractors when there is a public project. Disqualification is extremely difficult. Burden of proof on the owner or AE to disqualify a contractor in public setting. What is another way that an owner can determine the worthiness of a contact? Contractor’s record with surety company that provides bid bond and contact bond Construction Engineering 221

“lowest responsible bidder” Lowest bidder whose offer best responds in quality, fitness and capacity to fulfill the particular requirements of the proposed work and with the necessary qualifications to complete the job in accordance with the terms of the contract. In open competitive bidding by public and private owners the bid will go to the lowest responsible bidder. Construction Engineering 221

COST-PLUS-FEE CONTRACTS Contract value is NOT guaranteed Used when design and drawings are NOT complete Owner pays “reimbursable costs” plus a “fee” “Fee” is usually a percentage of total reimbursable cost (2% to 6%) Construction Engineering 221

Construction Engineering 221 Reimbursable Costs Defined by very detailed contract language Subcontract bidding and letting procedures Definitions of what types of costs can be reimbursed Payments to Subcontractor per subcontract Contractor’s field labor, material and equipment costs Definitions of what types of cost that will NOT be reimbursed Contractor’s main office overhead and staff Salaries of contractor’s officers Construction Engineering 221

Contractor’s Fee in Cost-Plus Contract Determined by taking into account: Degree of risk Nature and complexity Geographical location Equipment and manpower requirements Estimated construction time Final fee usually negotiated to be competitive (what will the market bear) Construction Engineering 221

Cost Reimbursable Contracts Cost–Plus-Fee as a Percentage-of-Cost Fee may be on a sliding scale (smaller percentage as the cost of the project increases) Fee of 10% for contract values <$50,000 Fee of 5% for contract values $50,000 to $500,000 Fee of 3% for contract values >$500,000 What is one of the biggest problems with Cost-Plus-Percentage-of-Cost contracts? No direct incentive to contractor to minimize construction cost. Fixed-Fee does provide incentive to contractor to keep construction cost under control – get it done and get on to another Project. The more time spent on the project less money made per expended effort. Bonus/penalties are tied to target figures. Important to have bidding documents in order. Target figures are associated with cost and time of project construction. Savings of time and money are reimbursed to the contractor. Contactor can be awarded 25% or more of the savings due to Early start up. Contractor agrees to a “not to exceed price” Construction Engineering 221

Cost Reimbursable Contracts (cont.) Cost-Plus-Fixed-Fee Contracts Incentive contracts (bonus-penalty) Share of the cost savings up to a maximum Bonus for each day finished early, or penalty for each day finished late Guaranteed Maximum Cost (upset price) Construction Engineering 221

Construction Engineering 221 Contact Documents The construction contract is comprised of a number of different documents. Most construction documents include: Invitation to bid Instructions to bidders General Conditions Supplementary Conditions Technical Specifications Drawings Addenda Proposals Bid Bond Agreement Performance bond Labor and material payment bond Often time the construction contract is thought of as one document when it is actually many Construction Engineering 221

Construction Contract Conflicts What if there is a conflict between the drawing and the specifications? Which is considered the governing document? And what if a construction requirement is found in only the drawings and not in the specification? Is it still a requirement? Construction Engineering 221

Construction Engineering 221 Retainage What is retainage and why is it necessary? Construction Engineering 221

Retainage or Retention A percentage of the payment to the contractor that is withheld each month Usually is 10% Owner may reduce below 10% after SUBSTANTIAL COMPLETION Paid by owner to contractor after FINAL COMPLETION of the project Serves as an incentive for contractor to complete ALL work per contract Construction Engineering 221

Other Contractual Terms Substantial Completion “Beneficial Occupancy” of the project Warranty Period Contact time Calendar days vs. working days “time is of the essence” Contractor advised the AE or owner that substantial completion has been achieved. AE performs a “punch list” - items that need to be completed or corrected AE issues a Certificate of Substantial Completion Owner can now occupy the project for its intended use. Maintenance, heat, utilities and insurance are now responsibility of owner Final certificate for payment is made when punch list is complete Final payment should take place 30 days after Certificate of Final Payment Warranty is normally for 1 year – sometimes up to 5 years for utility construction When does the warranty begin – Substantial completion or Certificate of Final Payment – depending on the contract Sufficiency of plans is not responsibility of contractor during warranty Completion time or specific number of calendar days Not a material obligation of the contract unless “of the essence” Hardship, expense or loss of revenue when project is not finished on time Liquidated damages are not actual damages - very hard to determine Amount of daily damages established in the contract. NOT A PENALTY! MUST BE REASONABLE Construction Engineering 221

Other Contractual Terms Liquidated Damages Used as a PENALTY for late completion Used in lieu of a determination of actual damages suffered by the owner Must be a REASONABLE penalty based on a forecast of actual damages the owner would suffer if the contractor is in breach of contract by finishing late Construction Engineering 221