Chapter 2: Contracts and Agreements PDF

# Chapter 2: Contracts and Agreements ## Chapter Objectives: - Learn about the two basic contracting formats and how they are acquired. - Understand the differences among the types of contracts, the important parts of a contract, and the applicable delivery methods. - Learn how an owner may opt to...

# Chapter 2: Contracts and Agreements ## Chapter Objectives: - Learn about the two basic contracting formats and how they are acquired. - Understand the differences among the types of contracts, the important parts of a contract, and the applicable delivery methods. - Learn how an owner may opt to use standard forms of agreements, a customized project-specific set of contracts, or a combination of the two. - Review the four basic types of standard form contracts available. - Learn about AIA contract documents and their uses. - Understand the difference between CMAA and AIA contracts for agency and at-risk CMs. - Understand the basic process for modifying a contract. ## Contracts A contract is an arrangement for the distribution of construction project risk- most frequently cost or performance risk-between the parties. Cost risk is the risk of not being able to complete a defined scope within a given budget, or of changes to the scope exceeding the original budget agreement. This risk distribution is accomplished through methods of arriving at or limiting the amount of money to be paid. Performance risk is the risk of not being able to complete the project on time and at the level of quality and cost as agreed. This is distributed through the technical terms of the contract, either by describing requirements for the finished product only or by describing specific methods by which a task is to be performed. All contracts require some form of a specific scope statement for the parties to make an accurate economic judgment as to cost. ## Formats Many contracting formats have evolved because of the desire of owners or contractors to either shift or share the risk (usually cost) of a project through contractual provisions or to increase the speed of delivery of the construction. * **Public and often private works** are usually procured through a sealed bid, fixed price contract. In these contract arrangements, most of the cost risk is intended to shift to the contractor * **All construction-phase contracts** are a variation of two basic forms: cost reimbursement and fixed price. ## Types of Contracts The actual usage of a particular contract for the construction phase depends on the delivery method being used, the type of project being implemented, the completion status of the plans and specifications at the time of contracting, and the consideration of any performance requirements. Other factors include the type and level of sophistication of the owner, the role of the designer(s), method of financing, scheduling requirements, and in the public sector, compliance with applicable laws and statutes. | **TYPE OF CONTRACT** (CONSTRUCTION PHASE) | **BASIC DELIVERY METHOD** | | :-------------------------------------------- | :----------------------------------------- | | Bid | Design-Bid-Build (Traditional) | | Negotiated | Multiple Prime | | Fixed Price/Lump Sum | CM At-Risk (CMAR) | | Cost Plus Fixed Fee | Design-Build | | Guaranteed Maximum Price | | | Time and Material | | | Unit Price | | | Fixed Price | | | Reimbursable | | * **Fixed Price Contracts,** also known as Lump Sum Contracts, are used in the private and public sectors, primarily with the traditional project delivery system for contracting with single and Multiple Prime Contractors. This form of contract is also used for contracting trade or specialty contractors as part of the CM at-risk and D-B delivery methods. * **Negotiated fixed-price contracts** are commonly used in the private sector, where contractors may be brought on before the design is complete to provide preliminary pricing and even to provide pre-construction services. * **Cost Plus Fixed Fee** The cost-plus-fixed-fee contract is a cost-reimbursement type of contract that provides for a fixed fee established at the time of contract award. The fee does not vary with the actual costs expended unless the scope of work is changed. * **Time and Material** This type of contract provides for the contractor to be reimbursed for all its time at fixed hourly rates for equipment and material, plus all subcontractor costs for construction. The contractor also receives a reasonable allowance for overhead and profit. * **Unit Price** This type of contract is used as one of the options associated with the traditional delivery system, when the exact quantities may be unknown. * **Guaranteed Maximum Price (GMP)** This contracting format is commonly used in the private sector and increasingly in the public sector, often in conjunction with the fast-track process (the overlapping of the design and construction activities). It is often associated with a CM at-risk delivery method. ## Standard Form Contracts | **Advantages** | | :--------------------------------------------- | | Increase the predictability of project outcomes | | Increase the consistency of pricing | | Simplify management | | Regularly updated | | Most Common | | AIA - American Institute of Architects | | CMAA - Construction Management Association of America | | Consensus Docs | | DBIA - Design-Build Institute of America | | Owner-specific | ### CMAA Contract Documents - CMAA Document A-1, Standard Form of Agreement Between Owner and Construction Manager (CM as Owner's Agent) - CMAA Document A-2, Standard Form of Contract Between Owner and Contractor - CMAA Document A-3, General Conditions of the Construction Contract; Owner-Contractor Contract - CMAA Document A-4, Standard Form of Agreement Between Owner and Designer. The four CMAA Standard Forms of Agreement for CM at-Risk (CMAR) where the CM has responsibility for construction performance are as follows: - CMAA Document CMAR-1, Standard Form of Agreement Between Owner and Construction Manager - CMAA Document CMAR-2, Standard Form of Agreement Between Construction Manager and Contractor - CMAA Document CMAR-3, General Conditions of the Construction Contract Between Construction Manager and Contractor - CMAA Document CMAR-4, Standard Form of Agreement Between Owner and Designer ### AIA Contract Documents - AIA Document A132-2009 (formerly A101CMa-1992) Standard Form of Agreement Between Owner and Contractor, Construction Manager as Advisor Edition. - AIA Document A232-2009 (formerly A201CMa-1992) General Conditions of the Contract for Construction, Construction Manager as an Advisor Edition. - AIA Document B132-2009 (formerly B141CMa-1992) Standard Form of Agreement Between Owner and Architect, Construction Manager as Advisor Edition. - AIA Document C132-2009 (formerly B801CMa-1992) Standard Form of Agreement Between Owner and Construction Manager as Advisor Edition. The AIA also has a set of documents that can be used when the CM is at-risk and provides a GMP option, although the concept of the AIA series is substantially different from that of the comparable CMAA series. - AIA Document A132-2009 (formerly A101CMa-1992), Standard Form of Agreement Between Owner and Construction Manager as Constructor where the basis of payment is the Cost of the Work Plus a Fee with or without a GMP. ## Modifying Contracts * **Seek legal counsel** and be thoroughly familiar with the system being implemented by the forms. * **Ensure that modifications are properly coordinated** with the provisions of other relevant project documents. * **Think ahead about how the modifications** will be received. * **Place accountability with the party** that controls the risk and avoid duplicative/overlapping responsibilities. * **Have the modifications reviewed and edited** by experienced staff before finalizing for approval. ### CMAA A1-A4 Contracts **CM is the owner's principal agent** **The CM handles the contract administration** ### AIA A101, B132 Contracts **The designer is the owner's principal agent** **The designer handles the contract administration** ### CMAA CM-AT-RISK **CM's extensive professional services during design** **Self-perform work only if low bid, owner approves, and a seperate GMP contract is signed** **Owner may reject GMP; CM may continue as agent** **Owner may require additional services after GMP is signed** ### AIA A133, B133 **CM's limited professional services during design** **CM may self-perform work at their own discretion without submitting bids** **No option for owner to reject GMP and continue CM's services** **No option for owner to require additional services after GMP is signed** ## Chapter Takeaways - A contract is an arrangement for the distribution of construction project risk-usually cost or performance risk-between the parties. - It is imperative that any construction contract is well written so that involved parties understand the risks involved and who is responsible for those risks. - CMS/CMARs use contracts to ensure that the construction phase objectives are completed without disputes or claims and to provide the framework in which any disputes and claims are resolved. - The choices for contracting one or more participants during the construction phase are fixed price or lump sum arrangement, or the use of one of the cost-reimbursement type contracts. - These contract forms can have many variations, and participants can be selected on a competitive or negotiated basis. - The correct standard contract forms may be used or modified by following the recommended process, applying careful consideration, and obtaining legal counsel.