Contract Price Delivery Methods

Delivery Method Options for Contract Price

• Different project delivery methods determine contract price, stakeholder roles, and risk allocation.
• Five primary delivery methods are explained, including examples, pros, cons, and comparisons.

Lump Sum (Traditional Method)

• Description: The contractor agrees to complete the entire project for a fixed price, regardless of incurred costs.
• Key Features: Fixed total price, high contractor risk due to potential cost overruns, requires complete design before tendering.
• Advantages: Predictable cost for the owner, simple and straightforward contract, minimal owner involvement during construction.
• Disadvantages: Less flexibility for design changes, higher contingency costs by contractors.
• Example: A government office building contracted for $10 million. If the project costs $11 million due to delays, the contractor absorbs the extra $1 million.

Cost Plus

• Description: The owner pays the contractor for actual costs incurred plus an agreed fee (fixed or percentage).
• Key Features: Flexible pricing mechanism, greater transparency of costs, owner assumes most financial risks.
• Advantages: Allows projects to begin before finalized design, more control over material selection and changes.
• Disadvantages: Risk of escalating costs for the owner, requires close monitoring of expenses.
• Example: A homeowner hires a contractor for a renovation with a 10% profit margin. If the renovation costs $500,000, the contractor receives $50,000 as their fee.

Construction Management (CM) at Risk

• Description: The construction manager acts as a consultant during design and general contractor during construction, guaranteeing a maximum price (GMP).
• Key Features: Combines lump sum and cost-plus elements, CM assumes risk for cost overruns, promotes collaboration between design and construction teams.
• Advantages: Improved project schedule due to overlapping design and construction phases, guaranteed maximum price provides cost certainty.
• Disadvantages: Higher fees for the CM, requires a higher level of trust and coordination.
• Example: A shopping mall construction project hires a CM to guarantee costs won't exceed $20 million, even if actual costs are higher.

Construction Management (CM) No Risk

• Description: The construction manager acts solely as an advisor, managing the construction process without financial risk for cost overruns.
• Key Features: CM provides professional advice and oversight, owner retains all financial risks, best suited for complex projects with multiple stakeholders.
• Advantages: Transparency and flexibility for the owner, CM focuses on project quality rather than managing risks.
• Disadvantages: Owner must closely monitor costs and progress, no cost guarantees.
• Example: A university hires a CM to oversee a new campus building. The CM coordinates contractors and ensures quality but does not provide a GMP.

Unit Price or Time and Materials (T&M)

• Description: Contractors are paid based on unit rates or actual time and materials used.
• Key Features: Flexible pricing for undefined scopes of work, ideal for renovations/maintenance, owner bears the financial risk.
• Advantages: Easy to adjust for changes in scope, useful for projects with uncertain scope.
• Disadvantages: Potentially higher costs for the owner, requires extensive cost tracking and verification.
• Example: A road repair project charges $100 per square foot for resurfacing. Total cost depends on the final area repaired.

Comparison Table

• Summarizes the different methods based on risk, flexibility, and project suitability.

Flowchart: Selection Process for Delivery Methods

• Guides selecting the appropriate delivery method by considering project scope and owner cost certainty needs.

Advanced Insights into Project Delivery Methods and Contract Pricing

• Hybrid approaches combine benefits of different methods, such as lump sum with unit price components for cost certainty or cost plus with GMP caps.

Contractor Selection Methods

• Competitive Bidding: Common in lump sum and unit price contracts, ensures cost efficiency by awarding contracts to the lowest bidder.
• Negotiated Contracts: Used in cost-plus or CM models, focusing on qualifications, trust, and collaboration rather than price alone.
• Prequalification: Contractors are prequalified for complex projects to meet technical and financial standards.

Legal Considerations

• Scope of Work Clauses: Clearly define included/excluded items, essential in lump-sum contracts.
• Change Order Management: In cost-plus or unit-price contracts; scope changes require formal approvals to manage cost and time impacts.
• Liquidated Damages: Contractors pay penalties for delayed completion, a clause in lump sum and CM contracts. Examples include a $50,000 penalty for a three-month delay

Risk Management in Delivery Methods

• Lump Sum: Contractors include contingency amounts in their bids to mitigate cost overruns, owner should set a "not-to-exceed" amount.
• Cost Plus: Owners should control spiraling costs by setting a "not-to-exceed" amount, and contracts include contingencies.

Technology in Delivery Methods

• Building Information Modeling (BIM) improves collaboration and reduces errors, helpful in CM methods.
• Project Management Software (like Primavera P6 or Procore) aid scheduling and cost tracking in CM and cost plus contracts.

FAQs About Delivery Methods

• Choosing the right method considers project scope, timeline, budget, and risk tolerance.
• Switching methods mid-project is often complicated legally and financially.
• Disputes from scope ambiguities are handled through clear documentation and proactive communication.

Explore the different project delivery methods that influence contract prices, stakeholder roles, and risk allocation. This quiz covers five primary methods, including their advantages, disadvantages, and comparisons. Test your understanding of how each method affects project execution and financial implications.