Construction Contract Options
When it comes to determining the way your project should be contracted and managed, there are some options that owners should explore before making a commitment to the way of doing business that’s traditional or the way they have always done it. Let’s begin by considering these factors.
How large or complex is your project? Simple remodels or tenant improvements can be overseen without much demand on you or your staff and without much construction expertise. But larger projects in scope and in cost or projects that require special construction experience may mean you or your staff will be overwhelmed by the construction process. Large or complex projects require a lot of planning and the process has to be managed closely to avoid costly problems and delays. This is a challenge even for seasoned professionals so owners should not hesitate to employ a team and a methodology that will yield the best result.
How much time and attention can you give to the project? Some busy owners have so little time that it doesn’t make sense for them or their staff to be burdened with the construction process. It is rare that an owner actually has the time to be able to focus on the construction project and give it the attention it needs. Different methods of contracting and managing the project can require less or more of your time or your staff’s time so that is something to consider.
Where is your time and effort best focused? This is the question that is most challenging for most owners to answer well. They believe part of the cost of doing the project is the sacrifice they have to make on their business and in some cases even their personal life. That same owner wouldn’t dream of doing his or her own car repair and yet would take on managing a construction project. As a rule, owners make money by running their business and they are better off focusing on their business and leaving the construction process to the professionals. The decision on what contracting method to use and how to manage the project is very important for the health of your business and perhaps your personal life during the construction process.
Now that I have you thinking, let me move on to the different methods of contracting that are available. Keep in mind that though the traditional method of hiring a general contractor on a bid/build basis with a lump sum contract is still the way the majority of projects are handled the other methods are getting to be more and more popular. At the core, the difference between that traditional method and all others is largely a matter of trust. The classic system puts all the parties at odds and let’s the force of contracts keep everyone in line. The other systems tend relax that tension and provide for the parties to be more of a team (in my opinion).
Construction Contracting Methods
The traditional bid/build method using a lump sum contract puts the lion share of the burden on the contractor. The architect (in most cases) acts as the interpreter of the contract documents and provides services like issuing change orders on behalf of the owner. The general contractor employs subcontractors and vendors to complete the work and is at risk for actions and failures of the subs and vendors and in some cases even for paying the subs and vendors if the owner fails to pay (the legalities of contracting are different depending on which state the project is in). This huge burden borne by the contractor not only puts the contractor at odds with the owner and architect but it often results in the contractor having to pad his numbers or create contingencies in the pricing to help cover the potential losses. So, while the owner may feel safe with this methodology he or she is most likely not getting the best value or the best product. This methodology benefits greatly from having a Construction Manager serve as the Owner’s Representative to help alleviate the tension, to help resolve issues, to review and analyze the GC’s numbers and to protect the owner’s interests. Without a CM, this methodology can be very demanding on an owner
The first option to the traditional methodology is bid/build cost-plus contract. The role of the architect and the general contractor is largely the same but the contractor is either given a fixed fee for managing the project that includes profit or the profit is a fixed percentage based on the costs. This methodology gives the owner greater control over the costs including selecting subcontractors and vendors. The reason this option is attractive to owners and contractors alike is because it makes the relationship less adversarial and promotes cooperative efforts like cost savings. This methodology takes some of the burden and risk from the general contractor and distributes it more equally with the owner and the subcontractors and vendors. The benefit for the owner is typically a more cost-effective project. However, this methodology does require more attention and involvement by the owner especially at the beginning of the project when the subcontractors are being selected. With the help of a Construction Manager, the owner can mitigate the demand of the process and have a successful project that is cost effective and without the usual tension between the parties.
The next option is design/build with a lump sum contract. This differs from the first two options where the owner employs the design team. In this model, the general contractor employs the architect and engineers or the general contractor and designers work as a team. This methodology improves the relationship between the architect and contractor and it makes disputes regarding scope rare which can make the owner’s life much simpler. It may not give the best value because the same party that controls the design also controls the costs but within the limit of the contract amount. The owner gives up the benefit of those controls in exchange for a guaranteed product for a guaranteed price. With this methodology, the role of the Construction Manager is largely to protect the owner’s interests in the design and construction processes.
At this point, it should be stated that there are variations on the contracting methodologies and there are different terms to describe them. The differences revolve around whether the project is managed by the owner or by a construction manager and in what form the contracts will be written. Rather than do an exhaustive analysis of each, this article is intended to offer some options for owners to explore.
The next option is bid/build with construction management (sometimes called multi-prime). The distinctive about this arrangement is there is no general contractor. The project is designed by the architect and prepared for bidding as with some of the other methods. The owner selects a construction manager and contracts on either an at-risk basis or simply as the manager with no assigned risk to oversee the project and handle all the bidding and awards. The construction manager is then responsible for selecting contractors and vendors to do the work. With this methodology, each contractor has a contract directly with the owner and the CM acting as manager. If the CM is at risk, the contracts are written between the CM and the contractor. The advantage of using a CM versus a general contractor is that typically the fee for the management of the project is less than a general contractor would charge for general conditions, overhead and profit. This methodology does require a good construction management company with a quality staff and depending on the size and complexities of the project the CM may need to have special resources that some CM companies may not have available.
The last option to be explored in this article is owner/builder. This option can be very advantageous for the owner who understands the construction process to some extent even though he or she may not be experienced in all the aspects of a construction project. The basic difference in this type of project is there is no general contractor and though the owner may use the services of a construction manager the owner will contract directly with all the parties involved in the project. There are a lot of projects that can be very successful using this methodology but many owners are unaware of this option. Any project can be done owner/builder though it would not be appropriate on projects that are large and/or complex. In this methodology, the owner hires the design team directly and then contracts with the contractors and vendors directly. In some people’s minds, direct contracting is a negative to considering doing a project as owner/builder since there is no one between the owner and the other parties to be held responsible is there is an issue. But those people should realize that the owner can hire a professional to act as the owner’s representative or to be the construction manager and the person or company will handle all aspects of the project on behalf of the owner. The advantage to this option is the owner has more direct control over all aspects of the project and there is some savings for not employing a general contractor. This option does require a qualified and capable person or company to manage the project on behalf of the owner.
One aspect f the different methodologies that isn’t discussed in here is the matter of risk. Each methodology has some level of risk. Typically, risk is mitigated with the methods that may be more costly in the end but there are many things that affect risk on a construction project and the contracting methodology is only part of the equation so discussion of risk is reserved for another article.
In conclusion, the contracting methodology you select as an owner depends on your goals for the project, what risk you are willing to take or not take, how involved you will be, and if you are willing to let others be in control of your project or not. You should explore the options and decide what is the best fit for you.