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Questions and Answers
What is a main characteristic of the Separate Contracts Method?
What is a key advantage of using the Force Account Method?
Under the Design Build Method, what is the primary benefit?
Which method is best utilized for fast-track construction?
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In the Construction Management Method (CM), who primarily manages the project?
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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?
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When is it advisable to use the Separate Contracts Method?
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What is a primary disadvantage of lump sum contracts?
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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?
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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?
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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?
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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?
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In which scenario are Negotiated Bids most commonly used?
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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?
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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?
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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?
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What is one advantage of fast tracking in construction?
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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?
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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?
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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?
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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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