July 19, 2004
Signed, sealed and delivered | Getting ready to build? An overview of the three basic kinds of construction contracts
By Kevin French
Owner/vice president, Ledgewood Construction, South Portland
The selection of a contracting method for the design and construction of a facility is never entirely objective. The schedule, the owner's experience with the construction industry, the owner's willingness to share risk, the complexity of the project and statutory limitations all influence the owner's decision.
There are three basic contracting methods, each resulting in a different relationship between the owner, the architect/engineer and the contractor or construction manager. Examine the different delivery methods to see what fits you best.
Design-bid-build
General contracting or design-bid-build is the traditional delivery method. An architect/engineer develops a design and produces construction documents. Then, the owner or the architect/engineer ˆ or both ˆ can prequalify interested contractors, in order to eliminate contractors who may not have the expertise or financial resources to complete the work.
On public sector projects, the owner is often required to have very liberal prequalification requirements or to accept bids from any contractor able to procure bid, performance and payment bonds. For privately financed projects, the owner can invite bids from prequalified contractors.
Next, the architect/engineer's detailed plans and specifications are used to solicit firm lump-sum bids from relevant contractors, and the owner and the low bidder execute a construction contract. The firm lump-sum price is based on the work described in the bid documents and usually is based on a specific completion schedule. Unless the owner has experienced construction personnel on staff, he generally will retain the architect/engineer to inspect the work during the construction process.
This project delivery method often can produce adversarial relationships due to differences between what the architect/ engineer produces and what the general contractor demands. The general contractor provides a price based on specific plans, and any changes to these documents may result in a contentious price change when there is insufficient or unclear information in the drawings.
Construction management
In this model, the owner typically views the general contractor, known as the construction manager, as a partner in the project and hires the CM early in the process, in order to benefit from the CM's expertise in design and budgeting. Although the owner/architect still assumes the risk for accuracy of the design documents, the CM potentially can eliminate many design inconsistencies prior to construction.
Construction management services generally are provided in two phases: preconstruction and construction. In preconstruction, the construction manager provides planning and scheduling, estimating, value engineering and constructability reviews, purchase of long-lead items and prequalification of subcontractors. The CM will track and control costs against the project budget to avoid unpopular cost overruns.
During the construction phase, the construction manager buys all required material, subcontracts services, controls and monitors budget and schedule, maintains building quality and completes the building as designed. The CM meets regularly with owners, trade contractors, vendors and designers to coordinate the different phases of the project. Much of the work is competitively bid to specialty subcontractors, often with the owner participating in the bid evaluation and award process.
The construction manager oversees the project and holds all the contracts. At an established time in the design development process ˆ generally at 80%-100% of design completion ˆ the construction manager provides a price guarantee to the owner. This price guarantee, which is in addition to the budget estimates the CM has been providing during the preconstruction phase, can be in the form of a guaranteed maximum price, known as a GMP, or a lump sum.
With a GMP, the owner reimburses the construction manager for actual costs up to the GMP. If the actual costs for the project exceed the GMP, the overage is the financial responsibility of the construction manager. If the actual costs for the project are less than the GMP, the savings are passed on to the owner, or shared between the owner and the construction manager under a mutually agreed-upon formula. With a negotiated firm lump sum, the construction manager is paid a fixed amount to deliver the facility, and generally keeps any savings.
Construction management works especially well for complex projects, such as those requiring substantial renovation or continuation of ongoing operations; or for projects with very aggressive schedules.
Design/build
In the design/build delivery method, the owner hires a single contractor both to provide detailed construction specifications and drawings and to build the facility. The contractor may have in-house architecture/engineering capabilities, or he may hire an architect/engineer and be responsible for that firm's services.
In order to provide a framework for comparison of proposals, the owner should establish a general statement of requirements and, potentially, the basic site layout and schematic design. The owner may hire an architect/engineer to provide the initial schematic design and specifications.
Because the owner may select the design/build contractor through a competitive bid process or on the basis of qualifications with a negotiated price, the owner retains a great deal of control during the selection process. However, if a competitive selection process is used, all candidates must be thoroughly prequalified to ensure that the selected contractor will be able to deliver the facility with the required quality and schedule.
When using the design/build approach, the owner may wish to retain a design professional or other consultant to assist in the evaluation and inspections of the project. The decision most likely will depend on the reputation of the design/build contractor and the owner's experience in managing major construction projects.
The design/build contracting approach generally works well for facilities that can be quantitatively defined, such as process facilities that produce defined products in defined quantities and warehouses with defined areas or volumes, or where the owner is able to establish a schematic design and basic outline specifications. The design/ build approach will also work well for any project where an owner and a contractor have established a high level of trust and a strong working relationship on previous jobs.
The selection of a contracting method for the design and construction of a facility is never entirely objective. The schedule, the owner's experience with the construction industry, the owner's willingness to share risk, the complexity of the project and statutory limitations all influence the owner's decision.
There are three basic contracting methods, each resulting in a different relationship between the owner, the architect/engineer and the contractor or construction manager. Examine the different delivery methods to see what fits you best.
Design-bid-build
General contracting or design-bid-build is the traditional delivery method. An architect/engineer develops a design and produces construction documents. Then, the owner or the architect/engineer ˆ or both ˆ can prequalify interested contractors, in order to eliminate contractors who may not have the expertise or financial resources to complete the work.
On public sector projects, the owner is often required to have very liberal prequalification requirements or to accept bids from any contractor able to procure bid, performance and payment bonds. For privately financed projects, the owner can invite bids from prequalified contractors.
Next, the architect/engineer's detailed plans and specifications are used to solicit firm lump-sum bids from relevant contractors, and the owner and the low bidder execute a construction contract. The firm lump-sum price is based on the work described in the bid documents and usually is based on a specific completion schedule. Unless the owner has experienced construction personnel on staff, he generally will retain the architect/engineer to inspect the work during the construction process.
This project delivery method often can produce adversarial relationships due to differences between what the architect/ engineer produces and what the general contractor demands. The general contractor provides a price based on specific plans, and any changes to these documents may result in a contentious price change when there is insufficient or unclear information in the drawings.
Construction management
In this model, the owner typically views the general contractor, known as the construction manager, as a partner in the project and hires the CM early in the process, in order to benefit from the CM's expertise in design and budgeting. Although the owner/architect still assumes the risk for accuracy of the design documents, the CM potentially can eliminate many design inconsistencies prior to construction.
Construction management services generally are provided in two phases: preconstruction and construction. In preconstruction, the construction manager provides planning and scheduling, estimating, value engineering and constructability reviews, purchase of long-lead items and prequalification of subcontractors. The CM will track and control costs against the project budget to avoid unpopular cost overruns.
During the construction phase, the construction manager buys all required material, subcontracts services, controls and monitors budget and schedule, maintains building quality and completes the building as designed. The CM meets regularly with owners, trade contractors, vendors and designers to coordinate the different phases of the project. Much of the work is competitively bid to specialty subcontractors, often with the owner participating in the bid evaluation and award process.
The construction manager oversees the project and holds all the contracts. At an established time in the design development process ˆ generally at 80%-100% of design completion ˆ the construction manager provides a price guarantee to the owner. This price guarantee, which is in addition to the budget estimates the CM has been providing during the preconstruction phase, can be in the form of a guaranteed maximum price, known as a GMP, or a lump sum.
With a GMP, the owner reimburses the construction manager for actual costs up to the GMP. If the actual costs for the project exceed the GMP, the overage is the financial responsibility of the construction manager. If the actual costs for the project are less than the GMP, the savings are passed on to the owner, or shared between the owner and the construction manager under a mutually agreed-upon formula. With a negotiated firm lump sum, the construction manager is paid a fixed amount to deliver the facility, and generally keeps any savings.
Construction management works especially well for complex projects, such as those requiring substantial renovation or continuation of ongoing operations; or for projects with very aggressive schedules.
Design/build
In the design/build delivery method, the owner hires a single contractor both to provide detailed construction specifications and drawings and to build the facility. The contractor may have in-house architecture/engineering capabilities, or he may hire an architect/engineer and be responsible for that firm's services.
In order to provide a framework for comparison of proposals, the owner should establish a general statement of requirements and, potentially, the basic site layout and schematic design. The owner may hire an architect/engineer to provide the initial schematic design and specifications.
Because the owner may select the design/build contractor through a competitive bid process or on the basis of qualifications with a negotiated price, the owner retains a great deal of control during the selection process. However, if a competitive selection process is used, all candidates must be thoroughly prequalified to ensure that the selected contractor will be able to deliver the facility with the required quality and schedule.
When using the design/build approach, the owner may wish to retain a design professional or other consultant to assist in the evaluation and inspections of the project. The decision most likely will depend on the reputation of the design/build contractor and the owner's experience in managing major construction projects.
The design/build contracting approach generally works well for facilities that can be quantitatively defined, such as process facilities that produce defined products in defined quantities and warehouses with defined areas or volumes, or where the owner is able to establish a schematic design and basic outline specifications. The design/ build approach will also work well for any project where an owner and a contractor have established a high level of trust and a strong working relationship on previous jobs.
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