Transcript TYPICAL DOCUMENTS COMPRISING THE CONTRACT

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 role
is to manage the construction aspects of a project on behalf of the owner, usually as
the owner's agent. A prime contract between an owner and a construction manager
is called an Owner-CM contract.
Owner-Contractor Contracts
The fourth and final construction-related prime contract party is the construction
contractor, the actual builder who determines the means, methods, techniques,
sequence, and procedures and directs the actual construction operations. Contracts
between 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/B
Hybrid form of contract has become prominent, where the contractual services of
design only and construct only contracts are incorporated into design/construct
or 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 designconstruct 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 nonfast-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.
CM CONTINUED
• 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
• 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 fixedprice 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 costreimbursable 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 fixedprice 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 conditions
Some 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