Lecture 2A: Project Delivery methods and contracts Flashcards
Traditional delivery method
Design activities are completed, only then can the building start.
Phased devliry method
Each design activity is completed, and thier respective build activities can start.
Fast track delivery method.
Part of the design activity is completed, and the respective build activities start.
Main points of traditional delivery method
- Longest duration
- Suitable for using a single contractor.
main points of phased delivery method
- Shorter overall duration
- Multiple contractors; requires project management.
main points of fast track
- Build starts before design is finalized.
- shortest overall duration.
- Difficult to manage, requires PM and multiple contractors.
Why do we use contracts?
- Describe scope of work
- specify duration
- specify the amount and method of payment.
- Control mechanisms
- manager/allocate risks
- Assign responsibilities and obligations
What is a contract?
Agreement between onwer and performing organization to execute a defined scope of work.
Things specified in a contract:
- NAMES of parties involved
- SCOPE OF WORK covered by contract.
- PERIOD of the contract
- Contract PRICE and METHOD TERMS OF PAYMENT
- The LANGUAGE and SOURCE OF LAW governing the cotract
- LISTING OF DOCUMENTS that are part of the contract.
6 Different types of contracts
- Lump sum
- Unit price
- Cost + fixed percentage
- Cost + fixed fee
- Cost + fixed fee + profit sharing
- Cost + fixed fee + sliding fees
Lump sum contract?
Used where it’s possible to compute accurate quantities of work prior to construction.
- single quoted price for
the entire job based on a complete set of plans and specifications
What is Lump sum equal to?
= Direct cost + indirect cost + Markup
Direct = labor + equipment
Indirect = project + home office overheads
Markup = profit
What is the markup based on and how is the payment made?
The markup is usually higher to account for risk, and the payment is made based on % work complete. ALl risk is on the contractor/seller.
What is the major advantage of the Lump Sum contract?
- Major advantage is that the price quoted is generally assumed to be the guaranteed price for the work.
-Therefore you know how much to budget.
Disadvantges of lump sum
- Ownver must complete plans and specifications before bidding and contructions (traditional delivery)
- Little to no flexibility to make design changes,
- Any deviation from original plans/specs must be handles as a change order -> costs for contract change.
What are unit price contracts
Used when it’s not possible to calculate exact quantity of materials needed. (highways, etc.)
-Broken down into work items based on units (m^3, etc.)
- An estimate on how much of each unit is baesd, and there is a price per unit that is set.
Disadvantage of unit price contract:
True price is not known until the project is completed (owner needs more budget)
- Uni prices are susceptible to being manupulated via unbalanced bidding for profit.
Responsiblity and risk with unit price contracts with owner and contractor
Best used when the the responsibility remains with the owner or the design is completed during construction.
Lower risk than lump sump for contractor.
Cost + fixed percentage contract.
- Contractor is reimbursed for all direct expenses for labour, materials and equipment, as well as indirect expenses (Reimbursable cost).
- Also paid a percentage of reimbursable cost as their “fee”
Example, reimbursable cost is 1M, percentage fee is 7%. If the project ends up costing 2M, the contractor will get 140K
When is the cost + fixed percentage contract best used?
- For projects with new technology
- Not recommended for time limited projects.
- More risk for the owner
Cost + fixed fee contract
- COntractor is reimbursed for al direct expenses for labour, materials and equipment, and indirect overhead.
- Contractor receives fixed fee.
- This fixed fee is paid regardless of fluctuation of reimbursable cost components, and is usually a percent of an originally estimated total cost figure.
Example: if the project is estimated to be 77M, and agreed upon 1% fee (770k), even if the project ends up costing more or less than 77M, the fee still is 770K
What are the benefits of cost + fixed fee
Gives incentive to contractor to finish the job as quickly as possible.
What is the risk in cost + fixed fee
Contractor can lose profit if project is delayed.
What is cost + fixed fee + profit sharing
- The contractor aims for a target price, and if the project ends up under target costs, savings are shared on an agreed percentage.
Example:
Fixed fee is 1.7M, sharing is 25%. - Target price is 17M.
- If total price was 16M, contractor gets 1.7M + 25% of (17M - 16M)
What is cost + fixed fee + sliding fee
- Rewards contractor when underbudget, and punishes when overbudget of target price.
Sliding fee = %agreed x ( target price - actual cost of construction)
The target price for a project is set as $17,000,000 (i.e. T)
* The contractor’s fixed fee is agreed as being $1,700,000.
* In addition, the base percent value for profit sharing is 5%
(i.e. R).
* If the contractor completes the project at an actual cost of
$15,000,000 (i.e. A), the sliding fee will be:
* Sliding fee = 0.05($17,000,000 – $15,000,000) = $100,000
* The contractor’s total fee will be: $1,700,000 + $100,000 =
$1,800,000
If the contractor completes the project at an actual cost
of $19,000,000, the sliding fee will be:
Sliding fee = 0.05($17,000,000 – $19,000,000)
= –$100,000
– This means the contractor will be penalized an amount of
$100,000)
– Note: The penalization is for +$100,000
* The contractor’s total payment will be: $1,700,000 –
$100,000 = $1,600,000
What are some types of risks?
– Force majeure: “acts of God” like war, earth-quake, etc.
– Indemnification (Insurance)
– Occupational safety and health of workers
– Suspension of work
– Liquidated damages
