Construction projects are a conglomeration of various parties that all need to work together. Working together requires that each of the team members know their roles and responsibilities and what they are required to deliver. A construction contract is a tool that you can use to help outline these requirements.
As not every project is the same, there are various types of contracts between the owner and contractor which depending upon which is chosen can change your responsibilities drastically.
The different types of construction projects include:
Below I’m going to walk you through the details of each as well as provide some real world examples. When utilizing each of these contracts it’s important to have someone knowledgeable in contract law prepare them – a lawyer or accountant should help review the nuances.
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A lump sum contract is one of the oldest and simplest types of construction contracts. This type is often used by governments and in simple residential construction.
A construction lump sum contract is based on creating a defined scope of work to be performed by a contractor and assigning a dollar value to that scope of work. If the work that is required to be performed is outside of the “scope of work” it is considered to be an extra to the contract.
Under a lump sum contract the consultants are typically engaged by the owner and the contractor falls under a separate contract with the owner. The contract is typically governed by the prime consultant.
I would recommend a lump sum contract type if you’re looking to get moving quickly on a project and have a complete design. These are great for usage on simple residential and commercial construction projects.
As we move through the various contract types I’m going to keep the example consistent. For the examples I’ll be using a 10 storey office tower as the example building.
Utilizing a lump sum contract the owner would likely have engaged all of the consultants in advance and have a relatively complete design. Each component of the building would be outlined either in the contract documents or the scope of work.
The contract would be solely based on those documents and the scope of work. Meaning each door, wall, foundation type, mechanical unit, exterior wall system would be outlined in detail. Any change to, deviation or omission on those documents would be the responsibility of the owner to cover the costs.
While this contract type seems risky, it’s been in use for hundreds of years and only recently have alternative contract types started to be put in use in our industry. There are advantages and disadvantages to it which can include:
PROS
CONS
Construction Management contracts were introduced in the 1980s as a new way to manage construction contracts. Unlike their lump sum counterparts they encourage a more collaborative approach to construction.
A construction management contract is an agreement between an owner and a contractor that allows the contractor to take a leadership role on the project. The contractor typically provides a budget or estimate for the project that is based on a set of documents and fills in any blanks or risks with their experience. The contract typically includes things like coordination between documents (if one document doesn’t matches another the contractor is responsible).
Once the budget is provided the contractor engages subcontractors to perform the scopes and manages the owners money. Because the contractor has had to opportunity to build their own budget and the team is relying on their experience to fill in the gaps there can be less pressure on the contractor.
There are a few different types of construction management contracts but the two major ones are cost plus and guaranteed maximum price.
A cost plus contract type allows the contractor to provides a budget or estimate on the project. In the event that the overall project over runs the budget the owner is responsible. A guaranteed maximum price on the other hand provides cost certainty from the owner. In the event the project over-runs the budget the contractor is responsible.
As a former contractor a cost plus contract is really the holy grail of contract types with little risk!
Using the office building example we noted above, the construction management contract is more fluid. Unlike the lump sum contract a construction management contract can start on day one before documents are prepared.
An owner might provide a schematic design to a contractor and the construction management contract can be written up on it based on the contractors experience. In the case of the office tower the contractor may initially sign a contract for a 11 storey office tower for a budget of $10 million. The contractor charges the owner based on the actual costs of the project including rates for overhead agreed to as part of the contract.
As the design progresses the owner may opt to take the guaranteed maximum price option – locking in a number and providing themselves with cost certainty.
The nice thing about a construction management contract is that you’re relying on the contractor to be competent at what they do. This can have it’s pluses and minuses:
PROS
CONS
We all know that one contractor that complains about how bad designers are. The great thing about design build construction contracts is that it puts the contractors in charge of the designers and consultants.
A design build contract is similar in nature to a construction management contract where the contractor is required to take a leadership role in the project. The major difference however, is that the contractor engages the consultants and provides a complete proposal to an owner.
Unlike construction management contracts and lump sum contracts the owner typically issues a request for proposal at the start of a project. Contractors and consultants partner up to create proposals feature in different designs and prices for the owner. The owner then selects a team to design and construct the building.
The request for proposal will contain some high level variables that the project teams must stay within in, these can include price, design requirements, timeframes, etc.
Utilizing the office tower example, an owner may have a vision for an office tower. They would start the process by issuing an RFP to a prequalified list of contractors.
The RFP may outline things like – we want an office tower for $10 million dollars with 11 floors and 100,000SF. The project needs to be completed within 4 years. It may then go on to provide further detail on the usage of the spaces, requirements for consultants and services that are to be provided.
Contractors then assemble design teams and submit proposals to the owner. The owner performs a detailed analysis on the bids verifying that the proposals meet the requirements of the project and awards based on that.
The contractor and consultants then partner up to complete the design, documents, permitting processes and ultimately deliver the project.
Creating a team is one of the defining characteristics of design build contracts. If the project goes badly both the consultants and contractors will lose money. Therefore it is in everyone’s best interest for the project to go as planned.
That being said there are some pros and cons to the design build contract:
PROS
CONS
One of the new and more complex type of construction contracts is the Design Build Finance and Maintain model. Due to their complex nature these contracts are typically only reserved for some of the larges projects run by governments.
A Design Building Finance and Maintain type contract is very similar in nature to a design building contract with a few added complications. During the proposal process the contractor partners up with not just designers but a financial institution and a facility manager as well.
At the completion of construction the facility manager takes over the building and runs it for a set number of years defined in the RFP. The bank or financial institution offers lending to the owner. Essentially the owner has the length of the design and construction period as well as the maintenance period (which can be upwards of 25 years) to pay off the facility.
Utilizing the 11 storey office tower example, the process would work very similar to the design build construction contract example. The designers would be engaged by the contractor and they would collaborate to provide a design that works for the owner.
Because the construction team has a stake in the operation of the building often times the design process is much more involved. Owners create user groups which provide input throughout the design on how things like offices are laid out and spaces are used.
Once the construction team finishes building the office tower a facility manager takes over. They look after maintaining the building including janitorial staff and also maintain the building equipment (including mechanical and electrical equipment).
Finally during this whole process a bank is financing all of the work. They take care of paying all construction and design costs for the length of the project and then charges the owner a set amount per month.
This is a bit of a sensitive issue. There are plenty of articles online that criticize them. The challenge is that due to their size, when there are issues that the public sees they are usually large. As an example an over run on a two billion dollar project may be one hundred million dollars, however, in comparison to the size that’s only an over run of 5%.
Regardless, here’s a rundown:
PROS
CONS
During the start up phase it can often be daunting to have the conversation with your owner about a contract. It can seem intimidating and inexperienced owners may think you’re trying to take advantage.
For most industry veterans though a contract is a way to protect all of the people involved to ensure that if an issue arises there are rules and guidelines on how each party interacts. Having a contract on a construction project is one of the most fundamental requirements of any work.
What construction contract types have you worked under and what were their challenges? Feel free to share below in the comments.
Doesn’t address the most efficient construction contract types… LEAN project delivery methods such as Integrated Project Delivery, IPD and Job Order Contracting, JOC.
AN is a robust, dynamic process framework focused upon desired outcomes. The history of LEAN manufacturing begins with Ford and his ground-breaking automobile manufacturing company in the early 20th century. Students of LEAN history should begin with the Ford manufacturing plant in Highland Park, Michigan, USA., in 1913. It was there that Ford manufactured the Model T. He did not focus on making people work harder. He wanted people, and his company as a whole, to work smarter. LEAN Construction is an adaptation of LEAN production techniques specifically and appropriately applied to the construction industry. Very broadly it can be characterized as techniques aimed at maximizing value and minimizing waste. Robust, proven implementations; such as Integrated Project Delivery, IPD, for major new construction, and Job Order Contracting, JOC, for repair, renovation, and minor new construction; have subsequently been implemented for decades. LEAN JOC and IPD have proven to consistently improve productivity and quality as well as reduce waste, lower cost and speed delivery. It’s a real property owner’s responsibility to provide leadership, and drive the process. This is done within an atmosphere of collaboration and mutual benefit. Tools, training, services, and support are readily available for any real property owner to drive consistent on-time, on-budget, quality construction outcomes. Despite the proven benefits of LEAN construction, deployment has been limited to a small fraction (5% or less) of the industry. This is largely due to the cultural changes required for initial adoption and ongoing execution. LEAN construction requires fundamental changes in how people interact on a day to day basis. Reply
Great breakdown of common construction contracts! Understanding these agreements is vital for successful project management. Keep sharing valuable insights! 👷♂️🏗️ #ConstructionContracts #ProjectManagement To know about Tower Crane visit Potain Website! Reply
