Podcast
Questions and Answers
What is a main characteristic of the Separate Contracts Method?
What is a main characteristic of the Separate Contracts Method?
What is a key advantage of using the Force Account Method?
What is a key advantage of using the Force Account Method?
Under the Design Build Method, what is the primary benefit?
Under the Design Build Method, what is the primary benefit?
Which method is best utilized for fast-track construction?
Which method is best utilized for fast-track construction?
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In the Construction Management Method (CM), who primarily manages the project?
In the Construction Management Method (CM), who primarily manages the project?
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What defines the Construction Management at Risk (CMR) approach?
What defines the Construction Management at Risk (CMR) approach?
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What type of projects is the Construction Management Method most suited for?
What type of projects is the Construction Management Method most suited for?
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When is it advisable to use the Separate Contracts Method?
When is it advisable to use the Separate Contracts Method?
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What is a primary disadvantage of lump sum contracts?
What is a primary disadvantage of lump sum contracts?
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In a competitive bidding process, which factor is NOT an advantage?
In a competitive bidding process, which factor is NOT an advantage?
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Which type of contract is characterized by breaking down work into quantifiable units?
Which type of contract is characterized by breaking down work into quantifiable units?
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What type of construction contract often requires lengthy descriptions and documentation?
What type of construction contract often requires lengthy descriptions and documentation?
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What is a typical disadvantage of non-traditional contract methods compared to traditional ones?
What is a typical disadvantage of non-traditional contract methods compared to traditional ones?
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What is the main advantage of a competitive bid process?
What is the main advantage of a competitive bid process?
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Which of the following methods is NOT a type of competitively bid contract?
Which of the following methods is NOT a type of competitively bid contract?
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What is one significant drawback of using lump sum contracts?
What is one significant drawback of using lump sum contracts?
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What is a key benefit of using a Unit Price Contract?
What is a key benefit of using a Unit Price Contract?
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In which scenario are Negotiated Bids most commonly used?
In which scenario are Negotiated Bids most commonly used?
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What is one disadvantage of a Unit Price Contract?
What is one disadvantage of a Unit Price Contract?
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What are the two categories of contracts that can sometimes be combined in a bid proposal?
What are the two categories of contracts that can sometimes be combined in a bid proposal?
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What is the primary risk-sharing mechanism in Cost Plus Contracts?
What is the primary risk-sharing mechanism in Cost Plus Contracts?
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What is often a consequence of unbalancing in unit price bids?
What is often a consequence of unbalancing in unit price bids?
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Which of the following is NOT a method of reimbursement in Cost Plus Contracts?
Which of the following is NOT a method of reimbursement in Cost Plus Contracts?
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What aspect is often evaluated in a Negotiated Bid process?
What aspect is often evaluated in a Negotiated Bid process?
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What is one advantage of fast tracking in construction?
What is one advantage of fast tracking in construction?
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Which of the following statements about a negotiated contract is true?
Which of the following statements about a negotiated contract is true?
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What is a disadvantage of home office overhead costs in a contracting project?
What is a disadvantage of home office overhead costs in a contracting project?
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Which fee structure provides an incentive for the contractor to reduce costs?
Which fee structure provides an incentive for the contractor to reduce costs?
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In a sliding fee structure, what happens to the fee if the actual cost is below the target?
In a sliding fee structure, what happens to the fee if the actual cost is below the target?
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Which of the following best describes the general contract method in construction?
Which of the following best describes the general contract method in construction?
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What is the primary purpose of establishing costs for a contractor's equipment?
What is the primary purpose of establishing costs for a contractor's equipment?
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In a cost plus fee structure, what is a potential negative consequence for the owner?
In a cost plus fee structure, what is a potential negative consequence for the owner?
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Study Notes
Construction Contracts
- Construction contracts are usually longer and more complex than other contracts, requiring extensive documentation due to the detailed nature of the work.
- They often rely on other "essential documents" for complete understanding.
Procurement
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Bidding Process:
- Competitive bidding: Involves inviting several contractors to submit bids based on pre-defined plans and specifications. The project is awarded to the lowest bidder.
- Negotiated bidding: Involves inviting a select group of qualified contractors to negotiate a contract. This method allows for flexibility and customization.
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Contractual Arrangements:
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Traditional methods:
- Lump Sum: A fixed price for the entire project, regardless of actual costs incurred.
- Unit Price: A price per unit of work performed, with the total cost varying based on the actual quantity of work.
- Cost Plus: Reimbursement for actual costs plus a percentage or fixed fee for profit and overhead.
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Non-Traditional methods:
- Design-Build: A single contractor is responsible for both design and construction.
- Turnkey: Contractor provides a finished, operational project, including design, construction, and commissioning.
- Fast Track: Design and construction overlap, with work starting before design is fully complete.
- Construction Management (CM): A separate firm manages the project on behalf of the owner, coordinating with designers and contractors.
- Design-Build-Operate-Maintain-Warrant-Transfer (DBOMWT): A single contractor is responsible for design, construction, operation, maintenance, and warranty, eventually transferring ownership to the owner.
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Traditional methods:
Competitive Bid
- Competitive Bid: Owner advertises the project, inviting bids from qualified contractors.
- Lowest Bid: The contract is awarded to the contractor submitting the lowest bid.
- Pre-qualification: Some owners may pre-qualify bidders before the bidding process.
Competitive Bid Advantages and Disadvantages
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Advantages:
- Competitive pricing: Lowest bids create a competitive market.
- Fairness: All bidders are treated equally, minimizing bias.
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Disadvantages:
- Complete design: Plans and specifications need to be finalized before bidding.
- Limited control: Owner has less control over selecting the contractor.
- Bid preparation costs: Contractors invest significant time and effort in preparing competitive bids.
Lump Sum Competitive Bid
- Lump Sum: A single, fixed price covers all work and services defined in the contract plans and specifications.
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Advantages:
- Guaranteed price: Owner knows the total project cost upfront.
- Simplified payment: No need for detailed quantity tracking to determine project completion.
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Disadvantages:
- Detailed design: Designs must be complete and comprehensive.
- Risk for contractor: Contractors bid conservatively to cover uncertain design changes.
- Difficult changes: Changes in scope require cumbersome change orders.
Unit Price Competitive Bid
- Unit Price: Contractors provide a price per unit of work, with the total cost determined by multiplying unit prices by actual quantities.
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Advantages:
- Uncertain quantities: Suitable for projects with unknown quantities.
- Flexible quantities: Allows for adjustments in quantities with minimal impact on price.
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Disadvantages:
- Uncertain final price: The final cost can fluctuate based on actual work quantities.
- Accurate measurement: Requires meticulous quantity measurement for payment.
Cost Plus Contracts
- Cost Plus: Contractors are reimbursed for actual project costs, plus a fee for overhead and profit.
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Fee Structures:
- Cost + Percentage: A fixed percentage mark-up over actual costs.
- Cost + Fixed Fee: A fixed fee for overhead and profit, regardless of actual project costs.
- Cost + Fixed Fee + Profit Sharing Clause: Contractor shares a portion of cost savings with the owner.
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Cost + Sliding Fee:
- A fee that increases as actual costs fall below a target, and decreases as costs exceed the target.
Negotiated Bid
- Negotiated Bid: Owner negotiates a contract price directly with a chosen contractor.
- Selective bidding: Only a select group of pre-qualified contractors are invited.
When are Negotiated Bids Used?
- Private Industry: Buildings, power plants, and industrial projects often use negotiated bids.
- Government: Used in emergencies or for projects with uncertain characteristics.
- Fast-tracking: Suitable for projects where quick start is required with limited design information.
Negotiated Contract Advantages and Disadvantages
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Advantages:
- Stronger relationships: Closer collaboration between owner and contractor.
- High quality: Provides incentives for higher quality work.
- Flexible design: Permits design changes during construction.
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Disadvantages:
- Unknown cost: Owner may have less certainty about final project cost.
- Potential abuse: Cost-plus arrangements can encourage contractors to inflate costs.
Fast Track Construction
- Overlapping: Design and construction phases partially overlap.
- Preliminary designs: Contracts are based on preliminary drawings and specifications.
- Design completion during construction: Design work is completed concurrently with construction.
General Contract Method (Traditional)
- Owner-General Contractor Relationship: Owner contracts with a general contractor for the project.
- Subcontracting: General contractor may subcontract some or all of the work to other contractors.
- Brokerage: If the general contractor primarily subcontracts work, their role becomes more of a project manager or broker.
Separate Contracts Method
- Owner-Direct Contracts: Owner directly contracts with multiple contractors for different aspects of the project, without a general contractor.
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Suitable When:
- Competent construction manager: Owner has internal capabilities or access to a qualified construction manager.
- Limited project scope: Project involves a few distinct construction types.
Force Account Method
- Owner Management: Owner directly manages and executes the project, providing materials, equipment, labor, and supervision.
- No Formal Contracts: No formal contracts are established with external contractors.
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Suitable When:
- Small projects: Simple, straightforward projects with manageable scope.
- On-going Work: Repetitive, ongoing maintenance tasks.
Design-Build Method
- Single Contract: A single contractor is responsible for both design and construction, simplifying the contract structure.
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Advantages:
- Reduced disputes: Less chance of conflicts between designers and contractors.
- Improved coordination: Coordinated approach from design through construction.
- Time savings: Design and construction can proceed concurrently.
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Suitable When:
- Complex projects: Large and complex industrial projects.
- Fast-track construction: Projects where construction starts before design is complete.
Professional Construction Management (CM) Method
- CM as Owner's Representative: A construction management firm manages the project on behalf of the owner.
- CM Responsibilities: CM coordinates design, construction, and other project-related activities.
- Suitable For: Large and complex projects requiring specialized expertise.
Construction Management at Risk (CMR)
- Guaranteed Maximum Price: CM provides a guaranteed maximum price to the owner.
- Fee and Risk: CM charges a fee and assumes the risk of exceeding the guaranteed maximum price.
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