ConstructionContracts

INTRODUCTION TO CONTRACT ARRANGEMENTS

There are four main types of contracts conventionally used in the construction industry, namely:

A) STIPULATED PRICE
B) COST PLUS
C) PROJECT_MANAGEMENT/CONSTRUCTION MANAGEMENT
D) A DEVELOPMENT PROPOSAL

STIPULATED PRICE CONTRACT

Also known as Lowest Price Contract or Competitive Bidding Contract, this contract follows the Canadian Construction Documents Committee Form #2, and is the most commonly used for new construction projects. The people involved in the project are usually the Client, a Design Professional and the General Contractor. Their work is centered on a full set of working drawings with an anticipated total cost by a bid process.

ADVANTAGES:

· Tried and True Process

· Cost is known up front in the contract

· Competitive Bidding is Encouraged

· Transparent

· You do not necessarily have to accept the lowest bidder or any bidder

· Trust and reputation is important

DISADVANTAGES:

· Slow – Construction can’t start without a full set of construction documents

· Money distribution can be difficult to manage: if the GC does not pay the TCs (Sub Contractors or Trade Contractors), you will get liens on the project and Architects are in the line of ‘fire’ and can be held partly responsible

· Lacks flexibility for Design Changes

· Contractor can hide anticipated costs within Change Orders (CO’s) during the construction process

· During boom times, bids tend to be high

· TCs tend to blame each other if things go wrong (e.g., Mechanical blames Electrical)

· Holdbacks are not very effective management tools for ensuring project quality

COST_PLUS_CONTRACT

Also known as a Design/Build Contract, this contract involves the CCDC #3 forms where the contractor on a regular basis bills the client for construction materials and labour (TIME & MATERIALS). This includes the traditional individuals of contract work. The three major participants are the Client, a Design Professional and the General Contractor. It is commonly used when the scope of services is not well defined in the contract. This process tends itself to be a sequential construction method without the use of a full set of construction documents. This type of contract is well suited for renovations and small projects.

ADVANTAGES:

· Faster – a complete set of working drawings is not required

· Retrospective calculation of costs

· Flexibility for change during work

· Can be cheaper because the Contractors do not have to price in unknowns—the client is taking on that responsibility

· Architects and Contractors try to pass on liability to Clients

DISADVANTAGES:

· Total cost isn’t well defined

· No commitment for reduced expenses by Contractor

· Requires close inspection and review of construction

· A high degree of trust between Architect and Contractor is required

· Possibility of Client billing for construction errors

PROJECT MANAGEMENT CONTRACT

Also known as a Construction Management Contract, the CCA #5 contract involves a business arrangement between the Client and a Construction Manager. The Construction Manager acts as the represent to the Client when dealing with the General Contractor. This type of contract allows for flexibility in the total cost which must be well defined in the contract between the major participants. A full set of construction documents by a Design Professional must be included in order to define the scope of construction. A contingency fund is often included to be used by the Contractor to insure a high degree of quality despite unanticipated design changes. Site incentives and bonuses for early project completion and lower construction costs are also commonly used, reflecting a sharing of benefits (and liabilities) between the Client, Construction Manager and General Contractor. It is also possible to use this type of contract without a General Contractor; in this scenario the Construction Manager acts as the General Contractor as well. Both types of contracts are well suited to larger and highly complex projects.

ADVANTAGES

· Flexible for design change

· Possibility of a fast construction start

· Time & Complexity of construction works well with a manager

· Can use a GMP approach (Gross Maximum Price) guaranteed by the GC and administered by the Project Manager—this gets the GC, PM and the Client on the same side of the table so to speak

· Competitively bid TCs only with GMP approach

DISADVANTAGES

· Overall lack of responsibility on part of Construction Manager

· Tends to be more expensive to administrate—Client pays GC (10+10) and PM on top of this

DEVELOPMENT PROPOSAL CONTRACT

Also known as a Build-To-Suit Contract or a “Turnkey” Project, this type of contract arrangement is based on the CCA #14 forms where a stipulated price is agreed with certain modifications given to the Developer. The Developer has total control of design and construction – thus leaving the Client/Tenant/Investor/Institution with very little or no direct involvement. Often the Client will lease to own or purchase directly from the Developer upon project completion with a single tenancy. Includes land assembly, zoning, design, leasing, financing, project sale to REIT, Pen Fund, Bank, Public Co., Insurance Co., Investor, NGO, Owner-Occupier or other.

ADVANTAGES

· Fixed cost before construction

· Efficient construction time with little interference for changes

· Well suited for repetitive buildings or highly custom ones

· Low risk for Developers who have both tenant and investors lined up prior to start of project

DISADVANTAGES

· Limits the control of quality in materials and construction practices

· Typically uses standard architectural designs

· More expensive for the Client—often an institutional buyer is paying for the Developer’s time, GC, PM and the cost of finding a long term tenant