Construction Contracts and Project Delivery Methods

Objective Exposure to the different types of construction contracts, the number of contracts, the method of contractor selection and the basis for contractor payment.

Contract Defined An agreement between two or more parties representing a promise to be performed for consideration

Necessary Parts of a Typical Construction Contract Parties identified Parties make promises that constitute an offer Both parties sign the contract Both parties receive consideration: Contractor – payment for work done Owner – use of the completed project Parties of the contract must have the LEGAL AUTHORITY to negotiate a contract

Contractual Relationships Agreement between the OWNER and CONTRACTOR is the primary construction contract There are other contractual relationships which exist

Construction Agreement Forms Agreement – legal, binding, written document signed by owner & contractor Defines the relationships and obligations that exist By reference it incorporates ALL OTHER CONTRACT DOCUMENTS

Standard Forms AIA Document A101 EJCDC Document 1910-8-A-1

Advantages to Using Standard Agreement Forms—Disadvantages if Modified Forms Used Familiarity of the forms Legal precedents interpreting the documents Uniformity of terminology Disadvantages Modifications warrant care that all references are coordinated (change in one part of the form may require changes in several locations) Seek legal counsel

Conditions of the Contract Define basic rights, responsibilities, and relationships of the parties involved in the construction process in greater detail than the agreement

Design & Construction Parties Owner – may be an individual or an organization; initiates the project and secures funding for the design, construction and operation of the completed project Contractor – agrees to build the project; may enter into sub-contracts A/E – develops project designs and prepare construction documents; consultants may include: structural, civil, mechanical, electrical, acoustical, & environmental engineers and landscape architects, interior designers, and hardware specialists

Methods of Contractor Selection Competitive Bidding Direct Selection

Competitive Bidding Objective is to ensure that the cost of the project is reasonable and consistent with existing conditions in industry Publicly funded projects – owner required to select lowest bidder Private projects – owner may also consider the bidders’ qualifications, experience, financial condition, and performance history

Direct Selection Owner, with advice from the A/E selects contractor – total price and method of payment is then negotiated This method is generally NOT allowed for public projects

3 Decisions Made in Determining Kind of Contract Number of contracts Contract type Basis of payment

Number of Contracts Single Prime Contract – most common, uses competitive bidding (pg 3.12; fig 3.3-C) owner has contract w/ A/E & contractor; but A/E & contractor do NOT have contract Multiple Prime Contract – Owner divides the work among several contractors & has separate contract w/ each of them. (pg 3.13; fig 3.3-D) [e.g. paving, site work, foundations, landscaping, painting] Often used in FAST TRACK projects when construction on parts of the project is started prior to all of the design elements of the project being completed

Project Delivery Method Design-Bid-Build Design-Negotiate-Build Construction Management Design-Build Owner-Build Construction Subcontracts Total Project Commissioning

Design-Bid-Build Traditional method of project delivery Typically uses competitive bidding Considerations Project funding Owner’s capacity Cost Extent of work Time priorities See Figure 3.4-A on page 3.16

Design-Negotiate-Build Similar to the Design-Bid-Build contract but only ONE contractor involved in developing costs and negotiating a contract to construct the project Primary considerations are construction excellence and time (project costs not subject to competitive bidding process) See figure 3.4-B on page 3.19

Construction Management May have either single or multiple prime contracts Construction manager is employed by the owner to oversee and administer the project (may or may not actually perform any of the construction work) See pg 3.24; figs. 3.4-C & 3.4-D

Project Management Similar to construction management but also includes coordination of the design & planning stages of the project Large projects overseas have been successful using this Projects involving multiple structures & extensive site improvements often require this type of supervision; complex projects such as industrial & process engineering plants use this type of contract

Design-Build Owner contracts w/ a single entity to design as well as build the project Turnkey – an extended design-build contract in which the selection, procurement, and installation of all furnishings, furniture, and equipment is also included See pg 3.30; fig 3.4-E

Owner-Build This type of contract is usually seen with large-scale developers Only construction contracts needed are between the owner and various subcontractors See pg 3.34; fig. 3.4-F

Construction Subcontracts Usually involves a contract between the contractor and subcontractors and material suppliers May be verbal…best if written

Total Project Commissioning Defined by ASHRAE as a method to improve the delivery of a process. Focus is on QUALITY Makes sure that all components of a building are planned, installed, and maintained according to an owner’s requirements

3 Types of Basis of Payment Stipulated (Lump) Sum Unit Price Cost-Plus Fee

Stipulated Sum Simplest method used States that the contract requirements will be completed for a given amount of money

Unit Price Used when the extent of work or actual quantities can not be determined when bids are made (earthwork is such an example) Many civil engineering projects use unit price type of payment With unit price, the owner pays for exactly what is documented as done after the work has been completed

Cost-Plus Fee Contractor paid for actual cost of labor PLUS a fee for overhead and profit Fee may be a percentage of the labor & material cost or a fixed amount Cost-Plus Fee agreements may also include incentives for early completion It is reasonable for the owner to require a guaranteed maximum price to ensure that the total project cost will not exceed a given amount