Construction Contract & Risk Management Guide

• This guidebook is for Construction Contract and Risk Management.
• Supplement to the eLearning course Module 6: Construction Contract and Risk Management.
• Intended for built environment professionals (5-15 years of experience) seeking to enhance project management skills.
• One in a series that leads to PMI Construction Professional (PMI-CP)™ certification.
• Divided into eight parts.

Course Parts

• Contract Life Cycle.
• Contract and Delivery Method Strategies.
• Risk Classification and Prioritization on Built Environment Projects.
• Risk Management Framework and Process.
• Risk Management Tools and Techniques.
• Common Causes of Claims.
• Methods to Prevent and Reduce Claims and Disputes.
• Claims Pursuance and Dispute Resolution Process.

Contract Management Focus (First Two Parts)

• Contract life cycles, stages, activities, and best practices.
• Delivery methods, contract structures, and associated industry tools.

Risk Management Focus (Middle Three Parts)

• Project risk classification and prioritization processes.
• Risk management framework, stages, and process.
• Key tools and techniques for managing project risks in the built environment.

Claims and Disputes Focus (Final Three Parts)

• Main claims and disputes, including types and causes.
• How the contract and delivery strategy affects claims.
• The importance of a robust risk process.
• Best practices for reducing claims.

Material

• Standardized built environment claims process.
• Claims-dispute-resolution techniques.
• Review of recommended further reading.
• Review downloadable documents, templates, and other information from the eLearning course.

Contract and Risk Management

• Contract process is often completed without communication, leading to misunderstanding of contract clauses; resulting in wrong contract structures/delivery methods and issues/claims/disputes.
• Poor understanding of risks and prioritization can result in project failure.
• Planning and management throughout the project life cycle is necessary to mitigate claims.
• In certain cases, claims can't be avoided; early resolution is key.

Contract and Risk Management Objective

• Implement best practices across the contract life cycle.
• Allows the project manager to choose the right contract structure and delivery method at the right time.
• Classify, prioritize, and manage risks across the project life cycle to minimize or avoid claims or disputes.

Contract Management Defined

• Managing contracts that are part of delivery in the built environment.
• Involves creating, analyzing, and executing contracts.
• Ensures maximized operational and financial performance.
• Minimizes risks.

Risk Management Defined

• Careful management of inherent risks in built environment projects to avoid loss or failure.
• Designed to plan, monitor, and control measures to prevent risk exposure.
• Involves active risk management and establishing processes/procedures during the planning stage.

Claims and Disputes Defined

• Commonly arise between construction contract parties due to issues like delays and unforeseen circumstances.
• Claims are often made for losses/expenses, extensions of time, and liquidated damages.
• The contract should set out the definition of a claim or dispute and how to resolve it.

Contract Life Cycle

• Contracts are legally binding agreements for delivering an agreed scope of work.
• The topic includes contract life cycle stages, activities, and best practices.

Contract and Delivery Method Strategies

• Built environment projects all require a specific project delivery method and contract structure.
• The topic includes project delivery methods and contract structures and how to select them correctly.

Risk Classification and Prioritization

• Complexities in contract management generate risks requiring vigilance.
• Risk management is vital for successful project delivery.
• This topic includes the importance of risk management and correct risk classification.

Risk Management Framework and Process

• Delivery methods affect how risk is managed in built environment projects.
• The topic will discuss risk management models and how to choose the optimal model.

Risk Management Tools and Techniques

• Using the correct tools and techniques in the risk management process leads to significant benefits.
• The covered topics are the main risk management tools used in the built environment and how to use them to reduce project risk.

Common Causes of Claims

• Project entities often seek financial compensation for situations that lead to delays.
• The most common causes of claims and their types, and change orders versus contractual claims. Also how to identify areas that may result in claims by using lessons learned from previous projects.

Methods to Prevent and Reduce Claims and Disputes

• An effective risk management framework reduces claims upstream and prevents risks from escalating to disputes. Importance of being proactive in the prevention and best practices toward this end.

Claims Pursuance and Dispute Resolution

• Claims are inevitable in the built environment, and there must be processes for pursuing and resolving them. Claims pursuance process, as well as the singularities of mechanisms available in the built environment.

Contract Life Cycle Stages and Activities

• Contracts are fundamental to all projects and establish a formal agreement/transaction between two parties.
• Contracts require all parties to invest time/expertise to ensure project success and protect interests.
• Poorly constructed contracts can lead to undesirable outcomes.
• Top causation factors for claims/disputes are poorly drafted contract requirements and failure of contract management/administration.

Contract Life Cycle

• Simply setting up and signing a contract doesn't constitute a contract life cycle. Critical activities occur before and after.
• A project's contract life cycle differs from the project delivery life cycle. They run in parallel until commissioning and startup.
• The contract life cycle has five phases.

Contract Life Cycle Overview

• Begins during the feasibility/concept phases during front-end planning (FEP).
• Stages vary in duration/frequency based on factors like delivery method/risk profile.
• Design-bid-build delivery may have two proposal process stages (designer and general contractor).
• Design-build delivery may only have one proposal stage for the prime contract.
• Integrated Project Delivery (IPD) has one integrated contract, accelerating/combining stages.
• Stages change/expedite depending on the project/size.
• Each stage includes key activities and decisions.

Stage 1: Discovery

• Represented, kicks off at the project start when the owner turns the idea into a concrete project.
• The following complete analysis/work during the discovery: Owner consultants, design firms, and contractors.
• Owners plan the project. Other entities undertake business development to build relationships with potential clients.

Activities and Decisions in the Discovery Stage

• Project analysis: undertaken by the owner/consultant to assess the initial idea, feasibility, and value to the organization.
• Market assessment/benchmarking is undertaken early.
• Business development is undertaken early with owner/partner entities, engaging in discussions on job requirements, horizon, etc..
• Getting industry input, including its feasibility and structure.
• Owner organizations need to allocate enough time to develop relationships with potential suppliers; can help build early alignment and increase collaboration.
• Before full mobilization, the business case provides key data for stakeholders to decide whether to green-light the project and acts as point of reference.
• Designers, contractors, and subcontractors must determine their project “walk-away point”. This is especially important for megaprojects.
• The walk-away point should stem from the company's overall strategy in terms of risk and margin.
• Short term contracts: For owner organizations to issue short-term contracts to a contractor or design firm to undertake project validation or create the interim design on their behalf to identify areas of weakness.

Stage 2: Pre-Award

• Owner progresses here once the project receives the green light.
• Contracting entities are informed of their future project involvement. The owner finalizes the project delivery method/tendering strategies.

Key activities and decisions during the pre-award stage.

• Delivery method and contract strategy selection, made with enough project information from the discovery stage.
• Documentation of the Risk management process; a continuous process, outlined in the contract.
• Tendering or proposal strategy agreement; regulatory requirements may limit the selections.
• Tendering or RFP documentation draft; designs mature for tendering, providing more clarity and better contractor estimates.
• Complete Internal evaluation criteria set; supplier evaluation criteria should include Financial stability, credit rating etc.

Stage 3: Proposal Process

• Delivery method, contract structure, tendering/RFP strategy, and evaluation criteria have been finalized. Owner sends ITTs/RFPs to suppliers.
• Suppliers are given time to review, request for information (RFI) to shape their proposal.
• Once proposals are received, the owner evaluates/selects a contractor based on their evaluation criteria. The contract is formalized/signed.

Stage 4 Contract Execution and Management

• Contract is signed and the work has kicked off, the project or contract manager monitors and manages the contract as the project progresses
• Contract review sessions: It is a good practice to hold contract review sessions with all project stakeholders.
• Contract Management Plan and Governance: Develop and Communicate project's Contract Management Plan Contract completion and final payment requirements determine who's responsible for decision making. ###Stage 5 Contract Closeout
• After contracted work is complete, contractor notifies owner.
• Permits must be in place before continuing
• Requires Completion of operations and final accounting
• Contract clauses define the responsibilities, rights, and privileges of all contractual parties. Built environment contracts have unique project characteristics.

Types of Clauses

• Tracked throughout the project
• Key Contract clauses that address specific contract areas and conditions.
• Can download Key contract clauses like time barred clause etc from e learning course

Ensuring teams Understand Contract Clauses

• Review contract Documents are difficult to read due to Legal vocabulary
• Must be reviewed with the Project teams once they are signed
• Ensures team alignement to solve any Confusion in the process

Contract Management Best Practices

• 10 best practices that project professionals can leverage throughout contract life cycle
• Set up Integrated team involving whole teams
• Resources must be allocated upfront from all parties
• Set Contract Key performance indicator KPI as a central theme
• Identify Assess and manage contract risk
• Track and Manage chance. All entitys must track and manage them
• Resolves djsputes efficient. Disputes are common but it is important to resolves them effectively.
• Tailor project deliver method to achieve path to success.
• Use clear concise and unambigiuous languages that can easily be understood
• Cearly definite the scope of work is the most common pitfall
• Ckealry Insurance covergae for all entitys in contrcat so they can get insurecne
• Ensures that the contract is understood and fallowed by everyone

Conclusion

• Contracts are fundamental to all projetcs that must ensure its success

Learning obkectives in Part 2

• Understanding project method contract delivery is important part of a contract

General understanding for Project Method Contracts

• Need to have Budget, Design, Risks, Schedule
• Must know what the Project delivery method is: Engages the parties, influence ownship and modification
• Methods contain minum of 3 parties: Ownder designer and contractor

PDSC Procedure

• Construction Industry Insitute created the process
• Identifying the selection factors
• Assigning prefence weight and assigning aggregate scope
• The results of these will finalizes the decissions

Project DillverY method Types

• Professional Construction, Design Built, Construction Risk, Integrated Project Dillvery, Public Partnership

Contract structures

• A built evironment contract is mutual and legally binding agreement and defined roles an responsiblities
• The owner must Decide to create specifications for a facility

Cconsiderations for Choice Contracxt Type

• Owner should choose on the advice for enginners
• Consulltants and contractors should be fully informed about each consdtaint

Forms of Contract SFOC

• Provides legal Frramework with rights and obligations
• Common in construction with complexities and diversity fo the risks\
• SFOCR Provides guidance and directives
• SFAC helps for Key variables concerning contruction process SFOC aim for
• Minimixinf forgseeable issues
• Routine adminitrative
• Establsish project requirements that will be stisfied to close contract
• Standard Contract

SFOC AMmendments

• Can ammend to create flexibility and unique contract

SFOXC Examples

• Joiny contracts
• Engg Contracts
• Federation Ingineers Conractd Types of Payment Structures
• Lump Sum
• Cost plus fee
• Units admeasurement cost
• Timer Materials

Contracst Awards

• The contract must state that all parties will give the lowest price if bidder is prequalifed
• Contract risk must be divided in to performance cost