CONSTRUCTION CONTRACTS – OWNERS RISK #djawest : Often times I am approached by friends and prospective clients that are in need of explanation, direction or supplemental information on how best to engage a contractor. While this topic is much more inclusive than what can be shared within this brief informational, the graph above (Fig 1.0 link found at the bottom of this discussion) will help to assist with understanding risks involved relative to the Construction Contract selected.
Basically, different types of construction contracts can be sub-divided into two large groups. One group includes those contracts for which the owner selects a contractor based upon competitive bidding; the other in which the owner negotiates a contract directly with the contractor.
Summarizing, a competitive environment fosters the best price and an efficient construction schedule. Risk of claim or a dispute can be greatly diminished by issuing comprehensive supplemental conditions and by understanding how to control other associated project costs not well defined by the construction documents: weather protection, below grade obstructions, utilities, allowances, and owner driven change orders or extras.
As always, Dan Joseph Architects http://www.djawest.com/ is available to assist you with understanding the many options possible, implications and risk associated with any preferred method, including: Lump Sums, Unit Price, Competitive Bid, Special Reimbursable, Contractor Fees, Cost Plus-Percentage of Cost, Cost Plus-Fixed, Incentive Fee Contracts, Guaranteed Maximum Price and Design Build.
COMMON METHODS OF CONTRACTOR SELECTION
Competitive Bidding – By where Contractors have been pre-qualified based upon experience, reputation and capacity to serve; award would go to the “lowest responsible bidder” qualified to complete the job in accordance with the terms of the contract.
Negotiated Contract – By where a Contractor has been hand picked based upon experience, reputation and capacity to serve; candidate is assumed to be qualified to complete the job in accordance with the terms of the contract.
Cost Plus Fee Contract – Contracts of the cost-plus-fee variety are used where, in the judgment of the owner, a fixed-sum contract is undesirable or inappropriate. Cost-plus contracts are normally negotiated between the owner and the contractor. Most cost-plus contracts are open ended in the sense that the total construction cost to the owner cannot be known until completion of the project.
Cost Plus or Time and Material agreements should be thought of as “on the clock” arrangements that if used exclusively, may reduce the incentive to manage closely the work at large, resulting in inflated budgets, unexpected cost(s) and extended schedules. However, when used in conjunction with Competitive Bid Contracts, there are benefits to limited hourly tasking that at times will prove to be useful for managing project cost.
POINTS TO REMEMBER:
1. Competition fosters the best price and a timely completion of your project.
2. Limit disputes by making sure that your architect issues Supplementary Conditions with the Bid Set for items not well defined in the General Conditions: weather protection, below grade obstructions, utilities, allowances, supervision, clean up, dumpsters, schedules, equipment rentals, other responsibilities, insurances requirements, safety programs, RFI’s, etc., along with owner driven change orders (adds & deducts).
3. Understand the common methods of Contractor Selection and the attached graph for implications.
Click the link below to print Construction Contracts – Owners Risk Graph: