PROF. JAMES T.
POWERS, AIA
CONSTRUCTION
MANAGEMENT &
CONTRACT
ADMINISTRATION –WEEK 3
THE CONSTRUCTION
INDUSTRY –
CONTRACTS
•LAST WEEK
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CONTRACTS
DEFINITION
• 1) n. an agreement with specific terms between two or more persons or entities in which there is a
promise to do something in return for a valuable benefit known as consideration. Since the law of
contracts is at the heart of most business dealings, it is one of the three or four most significant areas
of legal concern and can involve variations on circumstances and complexities. The existence of a
contract requires finding the following factual elements: a) an offer; b) an acceptance of that offer
which results in a meeting of the minds; c) a promise to perform; d) a valuable consideration (which
can be a promise or payment in some form); e) a time or event when performance must be made
(meet commitments); f) terms and conditions for performance, including fulfilling promises; g) perfor-
mance. A unilateral contract is one in which there is a promise to pay or give other consideration in
return for actual performance. A bilateral contract is one in which a promise is exchanged for a
promise. Contracts can be either written or oral, but oral contracts are more difficult to prove and in
most jurisdictions the time to sue on the contract is shorter (such as two years for oral compared to
four years for written). In some cases, a contract can consist of several documents, such as a series
of letters, orders, offers and counteroffers. There are a variety of types of contracts: "conditional" on
an event occurring; "joint and several," in which several parties make a joint promise to perform, but
each is responsible; "implied," in which the courts will determine there is a contract based on the
circumstances. Parties can contract to supply all another's requirements, buy all the products made,
or enter into an option to renew a contract. The variations are almost limitless. Contracts for illegal
purposes are not enforceable at law. 2) v. to enter into an agreement.
CONTRACTS
BASICS
• THE DELIVERY METHOD DESCRIBES THE MANNER IN WHICH A
CONSTRUCTION TEAM IS ORGANIZED FOR A PROJECT. A CONTRACT
DESCRIBES THE LEGAL STRUCTURE FOR THE PROJECT, BINDING
AGREEMENT BETWEEN PARTIES
• HAVING A CONTRACT MEANS THAT PARTIES ARE LEGALLY OBLIGATED TO
MEET THE TERMS OUTLINED IN THE DOCUMENTS THAT MAKE UP A
CONTRACT
• LEGAL PROTECTION, EXPECTATIONS
• CONSTRUCTION WORLD: CONTRACTOR OR ARCHITECT HAS TO PERFORM
THE WORK, THE OWNER HAS TO PAY
• IF EITHER PARTY FAILS TO PERFORM AN OBLIGATION AGREED IN THE
CONTRACT, THAT PARTY MAY HAVE BREACHED THE CONTRACT (DEFAULT)
• IN ORDER FOR THE CONTRACT TO BE A VALID, LEGALLY BINDING
CONTRACT, CERTAIN CONDITIONS MUST BE MET:
CONTRACTS
BASICS (CONTINUED)
• MUTUAL AGREEMENT
• BOTH PARTIES TO A CONTRACT AGREE WITH WHAT IT SAYS. EVERYBODY
AGREES TO EXACTLY THE SAME THING
• ONCE AN OFFER WITH DEFINITE TERMS IS ACCEPTED AND OTHER
CONDITIONS MET, THE PARTIES WILL HAVE A CONTRACT AND OFFER
CANNOT BE EASILY WITHDRAWN
• BE SURE YOU WANT THE JOB BEFORE YOU SUBMIT THE BID, BECAUSE IT
MIGHT BE ACCEPTED!
CONTRACTS
BASICS (CONTINUED)
CAPACITY
• ABILITY OF EACH PARTY TO HAVE A MUTUAL AGREEMENT
• EACH PARTY MUST FULLY UNDERSTAND WHAT THEY ARE AGREEING TO
• DO NOT GO INTO CONTRACT WITH MENTALLY ILL, OLD AGED ETC. THEY
SHOULD NOT BE HELD TO THE TERMS OF CONTRACT
CONSIDERATION
• VALUE GIVEN BY ONE PARTY TO ANOTHER AS AN EXCHANGE FOR
SOMETHING ELSE
• WHEN YOU MAKE A PROMISE TO DO SOMETHING, THAT PROMISE IS
GENERALLY ONLY LEGALLY BINDING IF THERE IS SOME KIND OF
EXCHANGE AND YOU ARE BOTH RECEIVING A BENEFIT FROM THE
ARRANGEMENT
• THE COURT DOES NOT CARE ABOUT CONSIDERATION
CONTRACTS
BASICS (CONTINUED)
LAWFULNESS
• THE OBJECT OF THE CONTRACT MUST BE LAWFUL. THE LAW WILL NOT
ENFORCE A CONTRACT WHEN IT IS FOR SOMETHING THAT IS NOT LEGAL
• ILLEGAL STRUCTURES
• UNLICENSED CONTRACTORS WITH IMPROPER CREDENTIALS WHICH LEADS
TO ENFORCEABLE CONTRACT
• THE CONTRACT PROVIDES A LEGAL FRAMEWORK FOR ADDRESSING
DISPUTES AND HAS SERIOUS LEGAL IMPLICATIONS
• AVOID MISUNDERSTANDINGS, CONFUSION, DISPUTES & LEGAL EXPENSES
CONTRACTS
BASICS (CONTINUED)
• IN CONSTRUCTION INDUSTRY AGREEMENTS ARE MADE BETWEEN
VARIOUS PARTIES:
OWNER – CONTRACTOR
OWNER – DESIGNER
CONTRACTOR – SUBCONTRACTOR
CONTRACTOR – SUPPLIERS
DESIGNER – CONSULTANT
• THE MAIN DIFFERENCE BETWEEN CONTRACTS IS HOW THE CONTRACTOR
GETS PAID AND HOW FINANCIAL RISK IS DISTRIBUTED BETWEEN THE
OWNER AND CONTRACTOR:
CONTRACTS
BASICS (CONTINUED)
ISSUES THAT IMPACT THE COST OF A CONTRACT INCLUDE:
• PROJECT DELIVERY METHOD- DIFFERENT DELIVERY METHODS LEND
THEMSELVES TO DIFFERENT CONTRACTUAL AGREEMENTS
• WHETHER THE JOB IS COMPETITIVELY BID OR NEGOTIATED -
COMPETITIVE BID JOBS TEND TO USE A FIXED PRICE CONTRACT
• RISK ALLOCATION - WHICH TYPE OF CONTRACT ALLOCATES FINANCIAL
RISK FAIRLY AND ENCOURAGES EFFICIENCY. CONTRACTS DISTRIBUTE RISK
DIFFERENTLY BETWEEN THE OWNER AND CONTRACTOR
• QUALITY OF DESIGN INFORMATION - PROJECTS THAT HAVE MANY
DESIGN UNKNOWNS, RENOVATIONS, ARE MORE SUITED TO A CONTRACT
THAT IS ABLE TO ADJUST TO CHANGES. CHANGES TEND TO BE COSTLY
• THE TYPE OF PROJECT – PUBLIC PROJECTS TYPICALLY HAVE FIXED PRICE
CONTRACTS. PRIVATE DO NOT.
EVERYONE RESEARCHES AN ARTICLE –
PICK ONE:
FAST TRACK PROJECT
IPD PROJECT
DESIGN – BUILD PROJECT
CONTRACTS
TYPES
THE FIVE MAIN TYPES OF CONTRACTS USED IN CONSTRUCTION:
1. LUMP SUM CONTRACTS (FIXED PRICE, FIXED COST, OR STIPULATED
SUM)
2. TIME AND MATERIALS CONTRACTS
3. COST PLUS CONTRACTS
4. UNIT PRICE CONTRACTS
5. GUARANTEED MAXIMUM PRICE CONTRACTS
https://www.youtube.com/watch?v=KE-FGYOXg6Y
CONTRACTS
TYPES – LUMP SUM CONTRACTS
A lump sum contract is a construction contract in which the contractor agrees to
complete the project for a predetermined, set price. Under a lump sum
agreement, also known as a stipulated sum, the contractor submits a total price
instead of bidding on each individual item. Because of its simplicity, a lump sum
contract is one of the 5 most common types of construction agreements. However,
there are a number of factors to consider to ensure you choose the right contract
for your project.
CONTRACTS
TYPES – LUMP SUM CONTRACTS (CONTINUED)
WHEN TO USE A LUMP SUM CONTRACT
There are some situations and projects where lump sum contracts can be the
choice for everyone involved. Generally speaking, projects utilizing lump sum
contracts have two crucial factors:
1. They have a clearly defined scope of work.
2. They are relatively straightforward to complete.
LUMP SUM PRICING
Because a lump sum contract features one overall price, the contractor better get
that price right. That sum comes from comprehensive plans, detailed
specifications and a little bit of trust.
Successfully using a lump sum contract means properly anticipating the project’s
schedule, all material, and lablr costs, as well as a good profit margin and
overhead costs.
CONTRACTS
TYPES – LUMP SUM CONTRACTS (CONTINUED)
ADVANTAGES OF LUMP SUM CONTRACTS
• SIMPLICITY – Documents clearly state the scope of work and amount the contractor gets
paid. Owners like lump sum contracts because they know exactly what the project will
cost at the end.
• PROFITABILITY – A contractor will build in insurance into their bid. If they are able to
control their overhead costs and the issues that come about are minor, they get to get
this amount.
• FINANCING IS EASIER – Owners have an easier time securing financing with a lump
sum contract than open ended contracts. Lenders appreciate knowing what the project
will cost at the end.
• PAPERWORK IS STRAIGHTFORWARD – Lump sum contracts has little paperwork.
Payments are on a progress schedule and the contractor doesn’t need to create
detailed invoices. Payments are easy.
• CASHFLOW IS EASIER TO MANAGE – Lump sum contracts tend to include percentage
payments at certain stages. The schedule makes receivables and cash flow simpler.
CONTRACTS
TYPES – LUMP SUM CONTRACTS (CONTINUED)
DISADVANTAGES OF LUMP SUM CONTRACTS
• HIGH CONTRACTOR RISK – Contractor assumes all risks involved bringing the project
to completion. Although they’ve built in insurance, problems can quickly surpass that
fund. When the project runs overbudget, the contractor assumes the risk.
• POTENTIALLY MORE EXPENSIVE – The owner understands that the contractor has
padded the costs and is assuming the risk. If the contractor is able to bring the project
in cheaper, the owner may have actually paid more for the project.
• PROJECTS CAN’T BE FLUID – Changes that occur during the project can be time-
consuming and paperwork laden. A Change Order is required and this is where the
contractor can make up for any losses during the project.
• CONTRACTORS CAN HIDE THEIR PROFITS – The paperwork involved in a lump sum
contract is far less detailed than other contracts. Unbalanced bids are common on lump
sum projects. The contractor can shift some of the profit to the mark ups in materials or
labor to hide their actual profit margin from the owner.
CONTRACTS
TYPES – LUMP SUM CONTRACTS (CONTINUED)
LUMP SUM EXAMPLE:
CONTRACTS
TYPES – TIME AND MATERIALS CONTRACTS
At their core, time and materials contracts are simple: contractors will be
reimbursed for the material costs, and they will also be paid a rate for the time
they’re working on the job. At the onset, it’s crucial to agree on what materials
will be paid for and what hourly rates will apply.
CONTRACTS
TYPES – TIME AND MATERIALS CONTRACTS (CONTINUED)
WHEN TO USE A TIME AND MATERIALS CONTRACT
The answer is unpredictable. No, literally! Time and materials contracts make the
most sense for jobs where the scope of work might change, or where it might be
hard to predict how much time and materials will be require to get the job done.
Otherwise, it doesn’t make much sense at all to enter into a contract where the
timeframe and profits are up in the air.
CONTRACTS
TYPES – TIME AND MATERIALS CONTRACTS (CONTINUED)
ADVANTAGES OF LUMP SUM CONTRACTS
• EASE – It’s easy to pivot if the specs change for the project. T&M requires are still the
basis for payments.
• DELAYS – The simple price structure makes it simple when discussing extra time or
resources required to complete the work.
• NEGOTIATIONS – Negotiations are simple. It’s easy to set the rules at the start of the
job for what materials will be covered and what rates will be for the time put into the
job. It’s also easier to set a cap on what can be spent and plan accordingly.
CONTRACTS
TYPES – TIME AND MATERIALS CONTRACTS (CONTINUED)
DISADVANTAGES OF TIME AND MATERIALS CONTRACTS
• TRACKING – Keeping track of time and how much money is being allocated for
specific materials can be time consuming and drag productivity.
• BENEFIT – There’s no benefit for being efficient. There is no benefit to finish quickly. This
can be worked out by including a bonus of some sort for finishing early.
• FRONTING COSTS – This is an expensive endeavor and can be risky if disputes arise.
On paper this system works, but an owner might question whether some materials are
necessary or if they’ve been used on the project.
CONTRACTS
TYPES – COST PLUS CONTRACTS
This kind of contract is used when you want to reduce risks and have your
expenses covered on the project. There are 3 types of costs that are associated
with this contract.
DIRECT COSTS – These costs are the actual cocts that go into the project. This
includes things like the direct labor, materials, equipment and even consultants, if
needed.
INDIRECT COSTS – These are typically called “overhead costs.” These include
office space, job insurance, mileage to and from the job site, and communication
expenses.
PROFIT – This is an agreed-upon amount based on a percentage of direct costs
for a particular job.
CONTRACTS
TYPES – COST PLUS CONTRACTS
ADVANTAGES OF LUMP SUM CONTRACTS
• BUDGET FRIENDLY – Decisions like whether or not to use the best materials become
easier when the cost won’t come out of the contractor’s paycheck.
• ESTIMATE – Costs are reimbursed as the job progresses. The contractor doesn’t have to
worry about an inaccurate estimate ruining their profit margin.
• CAP – If the owner needs to maintain a tight budget, this contract put a limit or cap on
the amount a contractor can spend on any given project. Failing to put a cap on a
project can turn into a drawback.
CONTRACTS
TYPES – COST PLUS CONTRACTS
DISADVANTAGES OF COST PLUS CONTRACTS
• MANAGE EXPENSES – For a disorganized contractor, keeping track of all related
expenses could be an issue.
• POTENTIALLY MORE EXPENSIVE – A contractor will have to make sure the “plus” will be
enough to cover all administrative expenses.
• CASH FLOW – These contracts typically operate via reimbursement. Meaning the
contractor needs to front their capital to cover expenses.
• CUTTING COSTS – The contractor’s profit is pre-decided and everyone knows how
much. The contractor will not be able to increase profit by cutting costs or expenses.
Cutting costs could actually lower the contractor’s profits.
• DRAWBACK FOR OWNERS – The more costs associated with the project, the more
“plus” can be charged by the contractor.
CONTRACTS
TYPES – COST PLUS CONTRACTS
COST PLUS EXAMPLE:
CONTRACTS
TYPES – UNIT PRICE CONTRACTS
In a unit price contract, the total contract price is based upon the price of all the
individual units of the work. Under a unit price contract, the contractor provides
the owner with a specific price for one or more tasks or a partial segment of the
overall work that’s required on the project. The owner then agrees to pay the
contractor for the units that the contractor expends to complete the project.
CONTRACTS
TYPES – UNIT PRICE CONTRACTS
UNIT PRICE EXAMPLE
The simplest example of a unit price contract is probably paying for ‘dirt by the
load.’ You will not know how many loads will be necessary, so setting a fixed
price will not work. Determining a fair price for each load can be used as a
means of compensation.
COSTS THAT GO INTO A UNIT PRICE
Labor costs, material costs, overhead costs, profit, taxes, permit and inspection
fees.
WHEN TO USE
A unit price contract works when the work can easily divided into identifiable
units. Where projects are repetitive or the price heavily dependent on materials,
and where the ultimate quantity of work might not be obvious, then unit pricing
makes sense.
CONTRACTS
TYPES – UNIT PRICE CONTRACTS
UNIT PRICE EXAMPLE:
CONTRACTS
TYPES – GUARANTEED MAXIMUM PRICE (CONTINUED)
A guaranteed maximum price contract sets a limit, or maximum price, that the
customer will have to pay their contractor or subcontractor, regardless of the
actual costs incurred. In its simplest form, a GMP contract simply puts a cap on
the contract price that can’t be exceeded. Costs beyond that GMP may need to
be covered by the contractor.
GMP contracts are attractive to owners because they shift a significant amount of
risk to the party performing the work. If the project comes in under budget, the
customer reaps the benefit, unlike a fixed price contract. Depending on the terms
of the agreement, these savings might be shared. It’s always a good idea to
incentivize contractors to finish the job on time and under budget.
CONTRACTS
TYPES – GUARANTEED MAXIMUM PRICE (CONTINUED)
PLANNING FOR UNCERTAINTY WITH A GMP CONTRACT
The problem for every contract with every project, is planning for uncertainty.
Since GMP contracts attempt to cap the total contract price, there needs to be
some mechanisms in place to add flexibility to the project.
CONTINGENCY AMOUNTS
Contingency amounts act as a contractor’s safety value, if one or more line items
exceed their estimated costs. They can be structured in two general ways. A
contingency can be an owner’s reserve or the contingencies can be built into the
anticipated price for the work.
If it’s built into the contract, there is still an opportunity for negotiation. A
contractor would prefer a lump sum so they could spread the overage over
separate line items. An owner may want the contingencies assigned to each line
item to have closer control.
CONTRACTS
TYPES – GUARANTEED MAXIMUM PRICE (CONTINUED)
ALLOWANCES
Allowances sometimes get confused with contingencies, but allowances are a way
to plan for the known unknowns. Allowances are amounts that are set aside for
decisions that the owner has yet to make regarding specific parts of the work. A
well-drafted allowances cause should detail whether the allowance covers
material only or it also includes labor. It should detail the notice and
authorization procedures and explain how the overages and underages are
handled.
CHANGE ORDERS
Change orders are another way to prepare for uncertainty in a GMP contract.
These are mutual agreements to increase the contract price or extend the time of
completion due to unforeseen conditions, unfinished plans, or owner changes that
materially affect the scope of the project. The GMP contract should establish the
procedure for the owner and the contractor to request and approve these
change orders.
CONTRACTS
TYPES – GUARANTEED MAXIMUM PRICE (CONTINUED)
ADVANTAGES OF GMP CONTRACTS
• ACCELERATED SCHEDULE – Since a GMP solidifies the final contract price
early on, that will expedite the bidding process. Construction lenders do not
like uncertainty. Consequently, a GMP makes financing simpler and this can
accelerate the project schedule.
• SAVINGS INCENTIVES – Most of the risk under a GMP contract is on the party
performing the work. This gives initial incentive to contractors and their subs to
keep costs down and complete their work before schedule. Cost savings can
be structured in a number of ways, but owners will typically agree to share in
the costs savings. This incentivizes everyone to collaborate and build a team
mentality.
CONTRACTS
TYPES – GUARANTEED MAXIMUM PRICE(CONTINUED)
DISADVANTAGES OF GMP CONTRACTS
• HIGH CONTRACTOR RISK – Contractor assumes all risks involved bringing the project
to completion. Although they’ve built in insurance, problems can quickly surpass that
fund. When the project runs overbudget, the contractor assumes the risk. The GC can
pass on some of the risk to their subs by having them sign similar contracts.
• INACCURATE COST REPORTING – For the owner to reap the cost reductions, the
accounting needs to be visible and transparent. The larger the project, the most it cost
and time it takes to review the accuracy of each payment application.
CONTRACTS
TYPES – GUARANTEED MAXIMUM PRICE (CONTINUED)
GMP EXAMPLE:
CONTRACTS
ORGANIZATIONS
AMERICAN INSTITUTE OF ARCHITECTS – AIA
• AIA Contract Documents (aiacontracts.org)
CONSENSUS DOCS
• Contracts & Law | Associated General Contractors of
America (agc.org)
• Free Service Agreement - Create, Download, and Print |
LawDepot (US)
• Create a Free Construction Contract Agreement | Legal
Templates
• Electronic Contract (hellosign.com)
https://www.youtube.com/watch
?v=XJ84oM7Fs7Y
https://www.youtube.com/watch?v=WVC
OYUXkeKg
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