THE PARTIES TO CONSTRUCTION-RELATED PRIME CONTRACTS

Construction-related prime contracts involve owners, architect/engineers, construction

managers, and construction contractors.

The owner typically contracts with one of the others, depending on the particular purpose to be accomplished by the contract.

• Owner-Architect Contracts and Owner-Engineer Contracts

Architect/engineers (A/Es) are entities that typically design projects, prepare drawings and specifications for the construction contract, and in some instances perform field inspection services and administration of the construction contract. Architectural Firms and engineering firms provide similar types of services.

The difference between them is that architects deal with residential,commercial, and institutional buildings, whereas engineering companies deal with engineered structures such as highways, dams, bridges, tunnels, and heavy industrial buildings and structures. Prime contracts between owners and architects are called owner-architect contracts, whereas such contracts with engineers are called owner-engineer contracts.

.

Owner-Construction Manager Contracts

Construction managers (CMs) are distinctly different entities from A/Es, their roleis to manage the construction aspects of a project on behalf of the owner, usually asthe owner's agent. A prime contract between an owner and a construction manageris called an Owner-CM contract.

Owner-Contractor ContractsThe fourth and final construction-related prime contract party is the constructioncontractor, the actual builder who determines the means, methods, techniques,sequence, and procedures and directs the actual construction operations. Contractsbetween owners and construction contractors are called owner-contractor contracts.

THE NATURE OF THE CONTRACTUAL SERVICES PROVIDED

Design Only Services• One obvious category of services is design only, which pertain to owner-A/E

contracts. The "only" distinguishes this category of contract service from another called design-construct (design-build). The creation of drawings andspecifications is a necessary part of the design process. Design only is normaly understood to include the preparation of a complete set of drawings and specifications used to secure bids and to construct the project.• Design only contracts may also include assisting the owner in obtaining and

evaluating bids for the purpose of awarding a construction contract, providing general inspection services during construction and providing monthly certified estimates of construction work satisfactorily performed.These estimates are the basis of monthly progress payments and final payment to the construction contractor. • Such contracts seldom require continuous on-site presence of the designer during

construction or exhaustive site inspections to ensure compliance with the drawings and specifications. Only such inspection services necessary to reasonably assure general compliance are normally required under a design only contract.

CONSTRUCT ONLY SERVICES

• The second obvious kind of contractual service is construct only, pertaining to owner-contractor contracts. This is the typical service provided by construction contractors.• It includes assuming full contractual responsibility to perform the

work according to the requirements of the drawings and specifications. Again, "only" is used to distinguish pure construction contracts from design-construct contracts.

DESIGN-CONSTRUCT SERVICES - D/C or D/BHybrid form of contract has become prominent, where the contractual services of design only and construct only contracts are incorporated into design/constructor design-build contracts. In this form of contract, the architectural or engineering design work, creation of the drawings and specifications, and actual construction work are all performed by a single entity.• therefore, the owner enjoys the advantage of dealing throughout with only one party that has complete responsibility. A number of companies furnish complete design-construct services using their own forces. Other companies market design/construct services as joint ventures or by using a subcontract to provide part of the required services.• An AlE may form a joint venture with a construction contractor or enter into a

subcontract with construction contractor for the construction portion of the overall project. More commonly reciprocal arrangements are made with the construction contractor in the lead role

TURNKEY AND FAST-TRACK DESIGN-CONSTRUCT SERVICES• Turnkey refers to a type of design-construct contract in which the contractor

performs virtually every task required to produce a finished, functioning facility.• This includes, in addition to the normal design-construct duties, procuring all

permits and licenses and procuring and delivering all permanent machinery or

equipment that may be involved. It would not be unusual for an owner who had

contracted on a design-construct basis for a complete hydroelectric power station

to furnish the turbines, generators. transformers, and switchgear, requiring the

contractor to design and construct the balance of the facility (including furnishing

all other necessary equipment and materials) around this owner-procured

permanent equipment. • Such a contract would be a design-construct contract, but it would not be a turnkey

contract. If the contractor also furnished the equipment items just listed the design-construct contract would also be a turnkey contract. All turnkey contracts are necessarily design-construct, but many design-construct

FAST TRACK CONTRACTS

• A fast-track project is one in which the construction phase is started at a point when only limited design work has been completed. For example, site grading and structure excavation begin when foundation design work is complete, but design work for all subsequent elements of the project, although in progress, is incomplete. This approach has the obvious advantage-on paper, at least shortening the overall delivery period for the completed facility (Concurrent design and works).

• Since "time is money," fast-track project delivery offers considerable potential savings to an owner. However, several severe risks accompany the fast-track the fast-track approach that can erode the potential savings. The foremost risk is that after construction is in place a problem may develop with subsequent design that requires costly and time-consuming changes to work already completed.

• At the very least, the owner loses the flexibility to make relatively inexpensive changes reflecting new and unexpected requirements, an advantage enjoyed throughout the design phase of a non-fast-track project.

• Sometimes the fast-track approach is used when the design and construction entities are not the same. each operating under separate contracts with the owner. It creates even greater risk for the owner, particularly if the design phase is not carefully managed. Errors, changes, or delays in design that impact construction are almost certain to result in claims from the construction contractor for additional compensation and time for contract performance.

CONSTRUCTION MANAGEMENT SERVICES

• The final type of contract service involved in construction-related contracts is construction management, pertaining to owner-construction manager contracts. A distinction should be made between this use of the term construction management as an administrative service performed for an owner and the meaning of that term as it relates to the direct management of construction operations by a construction contractor's organization.• Although many of the same professional qualifications are required, the two

activities are distinctly different. When services are being furnished on a construction management contract, the construction manager (CM) normally furnishes purely professional services as an agent of the owner and does not perform significant actual construction work-that is, an agency relationship is created between the CM and the owner.

• Although performing no actual construction,the CM may provide such "general conditions" items as utilities, sanitary services,trash removal, and general elevator or hoisting services for the benefit of the construction contractor or contractors. The CM's role as a provider of professional services is not unlike that of the AlE, who also provides professional services with the aim of serving the owner's interest.• CMs may be involved in the very early stages of a project, even the

predesign phase, to assist the owner in planning the project and in preparing a predesign conceptual estimate of the probable project cost. • This involvement may continue through the design and preparation of the

contract documents phase, where the CM will provide constructability advice, evaluations of alternate designs, and assistance in obtaining and evaluating bids for the construction of the project. During construction, the CM provides general administration authority, performs inspection services to ensure compliance with the plans and specifications, and assists in closing out the contract.

CM CONTINUED

CM CONTINUED

• A CM acting as the owner's agent is normally precluded from performing any actual construction work. However, in one form of CM contract, the agency relationship is partly replaced by the more normal owner-construction contractor relationship,where the CM's interest is separate from the owner's. Under this form of CM contract, the CM is part general contractor and does perform part of the construction work in addition to previously described CM services.• Although both entities are agents of the owner, CM and AlE services are

essentially different. • Figure 3-2 compares typical AlE and CM services. An AlE who has

designed the project may also serve the owner as a CM. The same AlE entity may have two separate contracts with the owner, one for design services and another for CM services, or a single contract that provides for both.

COMMERCIAL TERMS

• Another major difference in construction-related prime contracts centers on commercial terms, This part of the contract establishes the method of payment to the party providing the services and defines where the financial risk of performance lies.• The two broad classes of commercial terms for construction-related contracts

are cost-reimbursable terms (cost-reimbursable contracts) and fixed-price terms (fixed price contracts).• A cost-reimbursable contract is one performed almost entirely on the

owner's funds. As the provider of the contract services incurs costs in providing the services, the owner periodically reimburses the provider for these incurred costs,usually on a monthly basis. The provider thus has little or no funds tied up in the contract and the payments received from the owner are directly dependent on the costs of the services provided. In contrast, there is no relation between the costs that the provider of services may be incurring and payment received from the owner on fixed-price contracts.

COMMERCIAL TERMS continued

The owner pays the fixed price stipulated in the contract regardless of what costs the provider is incurring. The fixed price is normally paid in a series of progress payments, usually monthly, as the services are provided. Although there is basically only one form of fixed-price commercial terms, there are a number of different forms of cost-reimbursable terms:• Cost Plus Percentage Fee Terms• Cost Plus Fixed Fee Terms• Target Estimate (Cost Plus Incentive Fee) Terms• Guaranteed Maximum Price Terms• Fixed-Price Contracts

COST PLUS PERCENTAGE FEE TERMS

The simplest form of cost-reimbursable commercial terms is the cost plus percentage fee (CPPF) basis of payment, sometimes referred to as a cost plus or a time and materials basis. Many owners -A/E and and owner-CM contracts operate on this form as do many small construction contracts. The owner agrees to reimburse the costs incurred by the provider of the services and, in addition, to pay a fee equal to a fixed percentage of incurred costs that is stipulated in the contract. Aside from the practice of professionalism and the desire of the provider to protect his or her reputation for fair dealing in order to secure additional business, there is no incentive for the provider to control costs. Theoretically, the more money spent, the more earned. In the case of construction contracts this form of commercial terms has a particularly great potential for abuse.

TARGET ESTIMATE (COST PLUS INCENTIVE FEE) TERMS

A more sophisticated form of cost-reimbursable commercial terms is the target estimate form, some times called cost plus incentive fee (CPIF) terms.• The target estimate is an estimate agreed upon by the parties prior to entering into the

contract, as the most probable cost of providing the contemplated services. A fee as payment for the services is also agreed to, based on the magnitude of the target estimate with the provision that the parties will share the benefits or penalties of any underruns or overruns in the actual costs incurred in providing the services compared to the target estimate.

• The exact formula for the sharing of the underruns or overruns must also be agreed to at the onset and can vary widely depending on the particular contract. For instance, the formula could provide that the parties split underruns or overruns 50-50. It is not unusual for the provider of services to insist that the formula set a cap on the provider's share of any overruns, the cap usually being equal to the amount of the agreed-upon fee. In all of the previously discussed forms of commercial terms, the provider of the services bears none of the financial risk.

• In the target estimate arrangement, however, the provider does assume part of this risk, depending on the exact formula agreed upon. Ordinarily the target estimate approach requires that fairly definitive information about the services to be provided be known at the onset. As a result, the target estimate will be relatively more accurate than the initial estimate for a cost plus fixed-fee contract, although probably not as accurate as an estimate for a fixed-price contract.

GUARANTEED MAXIMUM PRICE TERMS

• Another form of cost-reimbursable commercial terms is the guaranteed maximum price (GMP) arrangement. This form is similar to the target estimate form in that the parties agree on an initial estimate for the cost of the contemplated services and on a fee for the provider based on this estimated cost.

• The agreed-upon estimate for the cost of providing the services and the agreed-upon fee, usually along with an allowance for contingencies, are then added together to yield the guaranteed maximum price which , as its name implies, is a price that the provider contractually guarantees will be the owner's maximum financial exposure for the services received. The owner then reimburses the provider for all costs of the services as they are incurred and makes pro rata payments of the agreed-upon fee as would be the case for CPFF and target estimate contracts.

• The difference is that once the owner has paid out funds equal to the GMP no further payment is made. The provider must then continue to perform at his or her own expense until all of the agreed-upon services have been performed according to the contract terms. If a point is reached when all services have been provided according to the contract terms and the owner's financial outlay is less than the GMP, the owner receives the total benefit of the savings. The GMP form of commercial terms has gained enormous popularity in recent years, particularly for contracts in the field of residential and commercial building construction. Obviously, unless the GMP is set at an inflated level compared to a reasonable estimate of the cost of providing the services the provider assumes a considerable risk of performance under this form of commercial terms.

COST PLUS FIXED FEE TERMS

• Because of the potential for abuse of cost plus percentage fee terms, the cost plus fixed fee (CPFF) form of commercial terms evolved. This form of payment is often used in federal government contracts for mili tary-related construction when war or the threat of war has created conditions where firm pricing is not feasible. • It is also broadly used for owner-A/E and owner-CM contracts and for private

construction contracts when for one reason or another the drawings and specifications are not definitive enough to permit firm pricing. In this form of commercial terms, the owner reimburses all of the service provider's costs and pays a fee that is fixed at the beginning of the contract. This fee will not change unless the scope of the services provided is expanded by change order to the contract. • The determination of the fee is usually based on an estimate of the probable cost

of the services to be provided or, sometimes in the case of owner-A/E or owner-CM contracts on a percentage of the estimated construction cost of the project involved that is agreed to by the parties prior to entering into the contract. This form of commercial terms ensures that, if the costs overrun the original estimate without a change in scope, the provider of the services will not benefit by an increased fee as is the case under CPPF terms.

FIXED-PRICE CONTRACTS

All of forms of commercial terms apply to cost-reimbursable contract situations. Other broad class of contract is the fixed-price contract, also called a firm-price contract, or sometimes a lump sum, or hard money contract. • All four terms mean that the provider will be paid an agreed fixed price for

providing the contractually stipulated services. There is no relationship between the payment received from the owner and the costs incurred by the provider.• The financial risk of performance is borne entirely by the provider of the

services. Fixed-price commercial terms require a particularly definitive mutual understanding of the scope of services to be provided.• In the case of construction contracts such an understanding is difficult to

attain unless a complete and accurate set of plans and specifications is available, upon which the fixed price can be determined and agreed.

FIXED-PRICE CONTRACTS continued

In any form of contracting, there is a definite relationship of risk to profit. When the commercial terms of any performance contract require that the performer or provider assume the entire financial risk of performance, that performer is taking a far greater risk than under other commercial terms. It follows that the provider is entitled to greater profit than would be the case if less risk were assumed. The profit potential in fixed-price contracting is much greater than for other forms of contracting, particularly for construction contracts. The fixed-price or hard money contract is the traditional form around which today's construction contracting industry evolved

FIXED-PRICE CONTRACTS continued

Fixed-price contracts in construction take one of two different forms:• The first is a true lump sum contract, where payment is made in a total fixed

monetary amount called the lump sum contract price. Usually, a breakdown of the lump sum price agreed to by the owner and the contractor is used as the work progresses to determine the appropriate part of the lump sum price to be paid monthly for work performed that month.The sum of the monthly payments will equal the lump sum contract price. Unless the scope of the work specified in the contract is changed the lump sum price will not change.• The second form of fixed-price contract is the schedule·of-bid-items contract.

In this type of contract, work is broken down into a series of bid items, each for a discrete element of the project work. Each bid item contains a title or name that describes the particular element of work involved, an estimated quantity and unit of measurement for the units of work in the item, an agreed fixed unit price, and finally, an extension price for the bid item consisting of the product of the fixed unit price and the estimated quantity of units of work.

Example:

• Figure 3-3 illustrates some of the comparative consequences of previously discussed forms of commercial terms.The table is constructed around the performance of a hypothetical project with an assumed estimated cost of $15,000,000, representing the best estimate possible at the time the contract was signed. • The table indicates the consequences to the contractor and to the

owner for both cost underrun ($13,500.000) and cost overrun ($16,500,000) outcomes under the various forms of commercial terms illustrated.

TYPICAL DOCUMENTS COMPRISING THE CONTRACT

Fixed-price, competitively bid contracts are comprised of certain, fairly typical documents The major categories of most contracts of this type consist of the following list:• Bidding documents, consisting of the "Invitation to Bid," the "Instructions to Bidders," and the "Bid Form"• General Conditions of Contract• Supplementary Conditions of Contract• Specifications• Drawings• Reports of investigations of physical conditionsSome contracts may not contain all of these categories but, with the exception of one-of-a-kind contracts, none is likely to contain material that won't logically fit into one or another.

Bidding Documents

• The first category, bidding documents, normally begins with an advertisement. The back section of contemporary industry periodicals, contains a plenty of bid advertisements.The advertisement identifies the project for which bids are desired, the owner, the time and place of the bid opening, and instructions to potential bidders on how to obtain a full set of contract documents.

• The second document in the bidding group is usually the Invitation for Bids (IFB) or, sometimes, a Request for Proposals (RFP). The government and some other owners use the IFB when bidders must strictly conform to the drawings and specifications and the RFP when bidders may propose variations for the project.

• Both typically include the following: • A description of the contract work • The identity of the owner • The place, date. and precise time of the bid opening • The penal sum of the required bonds (bid bond, performance bond, andlabor and materiál payment bond