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Jason Wilson

Apr 01
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construction contract review

Construction Contracts 101

By Industry Insights

Guide to Construction Contracts

Along with the excitement and anticipation surrounding the design and construction of a new
addition, building or a campus, every project begins with a construction contract.

There are several types of contracts available, each with its pros and cons, so it’s important to evaluate which approach is going to work best for the project at hand.

Factors to consider include the project’s scope, schedule, including the time you have to get the
project started, budget and the parties involved. These variables and the selected contract will significantly impact the project’s delivery and often profit margins.

The following is an overview of the eight most common contracts used in the commercial construction industry today.

Cost-Plus Contract

With this type of contract, all construction-related expenses are covered by the owner. This includes labor, materials, supplies, etc. In addition, overhead costs like insurance, gas mileage, construction trailers, etc., are accounted for as well.

Expenses are reported as they occur and contractors run a low risk of losing money in materials.

This type of arrangement is well suited for projects where the scope is not well defined and/or it’s difficult to provide a thorough estimate of the work. Also, if there is not ample time to move forward with other types of projects. That said, it will fall on the contractor to track expenses and submit them for reimbursement.

The cost-plus contract can also include incentives for coming in under budget and set caps on expenditures. Consequently, both owners and contractors are motivated to manage the project costs.

Design-Build

With design-build, a project’s design and construction is combined into one contract. With this project delivery approach, construction may commence before the design is completed. This fast tracks the construction and supports greater collaboration between the design and construction teams.

At the same time, it can be more challenging to estimate costs, plus the fact that there’s no competitive bidding in certain areas beyond the project’s onset. That said, the highly collaborative aspect of design-build contraction and the expedited speed to market often more than compensates for this.

Guaranteed Maximum Price

With a guaranteed maximum price (GMP) contract, the maximum amount the owner will have to pay the contractor is capped. Consequently, the building owner’s risks are lowered as the general contractor takes acts as the construction manager at risk (CMAR).

The contract includes costs for labor, materials, overhead and a percentage of those costs to generate a profit. This structure makes budgeting easier and can help expedite the lending process. Project plans are often finalized before construction, so change orders are minimized.

GMP requires careful review and analysis of expenses, which can be particularly time-consuming for large, multi-phase projects. In many cases, a shared savings clause in introduced, which allows any leftover funds to be spent by the contractor should the scope be missed during contract buyout. Further, the contractor must carefully price the project or risk paying out of pocket.

Lump-Sum

In the lump-sum contract, a total price is named for the entire job. This comprises all the time and materials, regardless of any changes or setbacks. Because the contractor is taking on a lot of risk, the cost is often set a little higher. This can be done on GMP and others as well.

This approach works well for projects with a well-defined scope.

Administration and cash flow estimates are easier and the contractor is freed up to focus on quality, materials and output.

For this type of contract to really pay off, contractors need to do a good job of estimating the project’s schedule, materials, labor costs, overhead costs and profit margins.

Integrated Project Delivery

With large, complex projects, integrated project delivery (IPD) can be a good choice. Like design-build, both the design and contract is included in one contract.

The owner, designer and building are motivated to work closely together, often applying lean principles, as they share risk. A lump sum profit is then divided amongst the owner, designer and builder in a financially successful project.

On the downside, IPD contracts are relatively new in the industry and some contractors might find it challenging to secure funding.

About the author

Barbara Horwitz-Bennett is a seasoned architectural journalist, covering the design and construction industry for the past 25+ years. She writes for numerous industry magazines and creates content for AEC firms, product manufacturers and industry associations.

Mar 19
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Construction workers on job site

Preconstruction Best Practices

By Industry Insights

Preconstruction Best Practices

Just as the foundation of a building must be strong, robust and precise in order to support the highest quality, long-standing structure, the same applies to the construction process itself, starting with preconstruction.

Beyond simply gathering bids for different aspects of the work, a project’s initial pre-construction phase should be a thorough and thought through process, beginning with establishing team communication.

This includes setting up the frequency of meetings, how documents will be transferred and determining the building team’s preferred communication styles.

Post-pandemic, the convenience and efficiency of platforms like Microsoft Teams and Zoom are well established. To optimize these online meetings, screen sharing is highly recommended.

Overall, the preconstruction phase establishes the project’s direction and allows for the designers and contractors to share ideas. When this process is organized, moving forward and on schedule, it will be the most effective.

Bid Management

During the bid management phase, the contractor identifies trade packages and creates clear scopes of work.

Experienced contractors often utilize master scope sheets developed over time. Reviewing past project scope sheets, change orders and sub quotes for different trades will help best inform the current scope document.

Through this process, it’s important to identify gray area items and address constructability to make sure that all material, equipment and labor is covered in the scope.

Prior to inviting subs to bid on the project, apps like TradeTapp is a useful way to  prequalify subcontractors.

A bid and award schedule is then developed and bid packages are electronically released to a broad range of vendors and trade subcontractors through tools like SmartBid and BuildingConnected. The latter platform, in particular, is quite popular amongst subcontractors and is therefore an effective way to solicit bids.

The contractor then conducts pre-bid conferences and answers subcontractor questions during the bid process.

Next, the bids are received and evaluated. This includes an in-depth bid review process to minimize uncertainties and hidden contingencies. Post-bid interviews are conducted with potential subs and then the contractor issues award recommendations and contracts.

Design Analysis and Constructability Review

The construction team then performs design analysis/reviews, identifies project constraints and performs constructability reviews. Contractors can lend their expertise in providing input on materials and product specifications, and assessing options for value engineering.

The contractor also develops a cost model and provides estimates as the design evolves. Once the cost model and budget are established, a budget tracking system is implemented to monitor any issues or changes in scope that put pressure on the budget.

To the extent that the team is organized and establishes regular lines communication and collaboration, the fewer surprises will arise down the road. This reduces the risk of project conflicts and delays, and increases opportunities for project savings.

Along these lines, team are encouraged to establish risk management strategies and examine all “what if” scenarios.

A recommended best practice is establishing a Master Schedule to identify long-lead time items, critical path items, occupancy and closeout. For example, equipment like elevators, electrical gear, HVAC units and generators tend to require longer lead times for delivery.

Bringing Value

To ensure a high level of quality and efficiency through this whole process, another best practice is establishing internal budgets at the conception of the job. Working hand in hand with architects and engineers then helps confirm that the project is staying on budget.

As for selecting subcontractors and companies to work with, it’s important to rigorously scope subs and suppliers to build the best qualified building team and ultimately offer the best value.

Another best practice is planning and sequencing phasing and site logistics to best coordinate project activities and address any safety concerns.

And finally, before construction commences, all necessary construction permits must be obtained. If time is of the essence, contractors may benefit from the services of a permit expeditor.

To learn more about working with Summit Design + Builds’ expert team of contractors, visit our Let’s Build Together page.