CEIE370 Week 4 Construction Contracts PDF

CONSTRUCTION CONTRACTS Comparison to Other Contracts Construction contracts are usually longer and more complex Requires lengthy description and thus longer documentation It seldom stands on its own without reference to the other “essential documents” ...

CONSTRUCTION CONTRACTS Comparison to Other Contracts Construction contracts are usually longer and more complex Requires lengthy description and thus longer documentation It seldom stands on its own without reference to the other “essential documents”  Procurement Bidding Process Contractual Arrangements Competitive Negotiated Traditional Non-Traditional Design Build Lump Unit Cost Turn Key sum Price Plus Fast Track CM Overview of Construction Contracts DBOMWT Design-Build-Operate-Maintain-Warrant-Transfer  Competitive Bid Owner advertises and calls for bids Provide bid documents May pre-qualify bidders before bidding Contract awarded to lowest bidder  Competitive Bid Owner invites a quote based on plans and specs, and awards to one of bidders Advantages – Competitive market- Low bid – All bidders treated equally- no favoritism Disadvantages – Plans and specs must be completed – Less control over selection – Contractor commits $$ for bid preparation  Primary Contract Types Traditional Lump Sum (Stipulated Sum) Unit Price Cost Plus  Types of Competitively Bid Contracts Lump (stipulated) Sum and unit price Lump Sum: One price covers all work and services required by contract plans and specifications (i.e. Costs + O.H.+ Profit) Advantages: Guaranteed price to owner Don’t need to measure field quantities as closely to determine % complete  Lump Sum Competitive Bid Disadvantages: Detail design must be complete, and comprehensive plans and specs available If not, contractor bids high to cover risk Quantity changes are cumbersome (e.g. change order) Applications: Primarily building construction Highly quantifiable  Unit Price Competitive Bid Breaks down work in a job to quantifiable units (e.g. CY of common excavation, etc.) Contractor applies unit price to these quantities provided in contract documents Contract awarded on low bid calculated by multiplying quantities by quoted price Payment is based on field  Unit Price Quote Rates/ Prices by units No total final price Renegotiate for rates if the quantity or work considerably exceeds the initial target Payments to contractor is based on the measure Ideal for underground work  Unit Price Contract Advantages: Can reduce risk where quantities unknown- lower bids Quantity take-off does not need to be so accurate Automatic allowance for quantity changes (+- 10%)- Fewer change orders Disadvantages: Final price can vary due to quantity variation Careful measurement of quantities for payment Subject to unbalancing of the bid  Unit Price Contract Applications: Heavy and Highway Others where quantities cannot be exactly known in advance (because of subsurface conditions, etc.) Sometimes Lump Sum and Unit Price can be combined as in the bid Proposal Form  Cost Plus Contracts Actual cost, plus a competitive/negotiated reimbursement to cover overheads and profit Four different methods of reimbursement Cost + Percentage Cost + Fixed Fee Cost +Fixed Fee + Profit Sharing Clause Cost + Sliding Fee Risk shared by owner and contractor  Negotiated Bid Owner negotiates a price with a contractor Only a few bidders are invited by owner Flexible contract provisions  What is a Negotiated Bid? Not necessarily on basis of lowest price Invite selected contractors, study qualification, previous experience, reputation, facilities and staff available, etc. and costs and fees More job flexibility in matching contractors to jobs  When are NBs are used? Private Industry: Buildings Power Plants Industrial Plants Government in special emergency situations Where characteristics of project are poorly known For fast-track work where quick start with limited design documents  Negotiated Contract Advantages: Better relations on site May be better quality Allows work to commence before plans and specs are completed (e.g. start foundations while superstructure is being detail designed) Makes it easier to change design while structure is being built (i.e. allows “fast tracking”)  Negotiated Contract Disadvantages: – Owner does not know exact cost – Can be abused by contractors (e.g. Cost +%, no incentive to keep cost down).  Fast Tracking Design and Construction overlap with most work packages Contract price based on preliminary drawings and specifications Design completed during construction, i.e. “finish engineering as we go”  General Principles Fact that the contract is negotiated does not preclude a payment scheme other than cost plus fee Could have a negotiated lump sum or unit price payment scheme “Negotiated” implies method of selecting contractor  Home Office Overhead Areas of home office overhead and indirect expense are very sensitive Owner should not be trapped into buying contractor a new set of computers or paying the contractors legal fees Normally home office costs are covered within the fee and are not reimbursed by owner in the reimbursable cost  General Principles Owner may wish to negotiate to specify which of the contractors management and technical personnel will be on the job Subcontracting procedures should be agreed upon Costs of contractor’s equipment should be established ($/hr, etc.)  Types of Fee Structures Cost + % of cost fee Cost + fixed fee – Incentive to complete contract quickly – May use expensive methods and materials Cost + fixed fee + profit sharing clause – Contractor shares (25%) of savings – Requires good initial estimate – Does have incentive to reduce costs  Fee Structure Sliding Fee – Target - % increase as amount falls below target, decreases as amount goes above T= Target FEE=R*(2T-A) R= Base% A= Actual Cost  Sliding Fee (Example) R= 5% T= $10,000,000 Below Target $9,500,000 Fee= 0.05*($20,000,000- $9,500,000) =0.05*($10,500,000)=$525,000 Above Target $11,000,000 Fee=0.05*($20,000,000-$11,000,000) =0.05*($9,000,000)=$450,000  General Contract Method- Traditional OWNER ARCHITECT/ ENGINEER GENERAL CONTRACTOR SUBCONTRACTOR WORKERS WORKERS  General Contract Method Contracted between owner and general contractor If general contractor does not work, i.e. subcontracts all work = brokerage Separate Contracts Method OWNER ARCHITECT/ ENGINEER CONTRACTOR CONTRACTOR CONTRACTOR WORKERS WORKERS WORKERS  Separate Contracts A general contract without the general contractor, i.e. Owner manages the project with in house capabilities or can sublet the construction management Advisable to use when: – Availability of competent construction manager. – When only a few types of construction will be performed  Force Account Method OWNER ARCHITECT/ ENGINEER WORKERS WORKERS WORKERS  Force Account No contracts are written Owner’s workers or employees Owner is manager and provides all material, equipment, labor and supervision No formal contracting procedures, i.e. time is saved Advisable when: – Small project scope – Simple, on-going work – Common maintenance projects, e.g. country roads, railroad Design Build Method OWNER ARCHITECT/ ENGINEER/ CONSTRUCTOR WORKERS CONTRACTORS WORKERS  Design Build Method Single contract package for both design and construction Reduces the disputes among parties involved Better coordination Time savings- design and construction concurrently Mainly used for large and complex industrial projects  Design Build Method Advisable for fast-track construction (i.e., for construction to begin before completion of design) Utilizes construction firm’s experience during design phase Like the general contract method except the G.C. is responsible for the design – Large industrial projects  PROFESSIONAL CONSTRUCTION MANAGEMENT METHOD OWNER ARCHITECT/ ENGINEER CONTRUCTION MANAGER (CM) VENDORS TRADE CONTRACTORS SUBCONTRACTOR WORKERS WORKERS Construction Management Method (CM) One firm manages the project The firm represents the owner Involved at both design and construction phases Ideal for large and complex projects Construction Management at Risk (CMR) CM is paid a fee and and gives owner a guaranteed maximum price. “CMR projects are characterized by a contract between an owner and a construction manager who will be at risk for the final cost and time of construction. In this agreement, the owner authorizes the construction manager to provide input during project design. The owner will either complete the design with its own design personnel or outsource the design work to a consultant.”