The Construction Contract Flashcards
What is the first thing the owner needs to do for a construction project?
Decide what kind of project he wants to do
Two ways construction contracts can be categorized
1) On the basis of price and payment scheme (Pricing model)
2) On the basis of their design and finance (Delivery Model)
What are the 4 pricing models?
1) Stipulated Price
2) Cost-Plus
3) Time and Material
4) Unit Price
Stipulated Price Contracts (aka lump sum)
- Contractor commits to perform specific scope of work for specific price.
- Contractor uses their own means and methods
How is price determined for stipulated price contracts?
Price provided by contractor (bidding process)
Benefits of Stipulated Price Contracts to the owner
1) Contractor bears all risk of costs and inefficient means and methods
2) Cost certainty
3) Get competitive offers (good price)
Disadvantages to the owner for stipulated price
1) Need design finalized in the very beginning phase
2) Owner still bears risk of poor design
3) Complicated to make changes to project because have to change contract
Cost-Plus Contract
Contractor paid on the basis of actual costs incurred (cost of work) plus a percentage fee for overhead and profit
What does contract lay out in Cost-Plus Contract
- What percentage is (depends on job)
- Detailed and closed list of items that factor into the work
Prince Albert Pulp Co v Foundation
- Implied in Cost-Plus Contract duty to prevent wasteful/uneconomic use of labour and materials
- Not duty to get best price, just must be reasonable
Benefits of Cost-Plus Contract to the owner
1) Can design as you go, just add to the list
2) Should be able to know early if they are being wasteful
3) Onus is on the contractor to prove reasonableness of costs
Disadvantages of Cost-Plus Contract to the owner
Less cost certainty, only certain when project complete
Advantage of Cost-Plus Contract for the contractor
1) Specified profit margin that shouldn’t be eaten into
2) Removes budget and cost escalation risk
Time and Material Contract
- A version of cost-plus
- Almost exactly like cost-plus but owner responsible for all means and methods
- Contractors just show up, give time and labour, and they bill on that basis
- Owner directs how time and material is divided up
Unit Price Contracts
- Used when rates for work are certain but quantities are uncertain
- Every unit of production is allocated a price
- Labour or material given a price
- Total contract price= number of units of that specification multiplied by the price per unit
Unit price contracts allow for an adjustment in the unit price if…
- The quantity varies greatly from the estimation
- Industry standard is 20% variation
- Provisions normally say 15%
Benefits of this model to the owner
1) Flexibility (don’t need to know exact numbers)
2) Based on actual quantities
3) Complete design not required
4) Allows project to start earlier (don’t need firm quantities)
Disadvantage for the Owner
1) Not a lot of cost certainty
2) Need additional staff to measure and report quantities
3) Not usually a contract for an entire project (used for segments)
Guaranteed Maximum Price
- For cost-plus, time and material, and unit price, you will have a guaranteed maximum price
- Transfers some risk back to the contractor
- Not the case if items outside the scope (ex: asbestos halfway through)
4 Types of Delivery Models
1) Design-bid-build
2) Design-build
2a) Turn-key project
3) Construction management for services (not at risk)
4) Construction management for services and construction (at risk)
Design-bid-build
Occurs sequentially
First: designer designs the project
Second: contractors bid on it
Third: chosen contractor builds the project
Relationship between designer and contractor in Design-bid-build?
No legal link between them
Design-bid-build- duty of care?
Neither owner nor designer owes a duty of care to the contractor to advise it on how to build the project
Advantages of design bid build to the owner
- Optimum involvement in design (documents formalized before sent out)
- Allows for competitive pricing
- Most certainty when it comes to cost
- Construction lenders love this (allows peak control and have details at outset)
Disadvantages for the owner in design-bid-build
- Project takes longer
- No construction input into design
- Owner responsible for all risks/costs associated with coordination conflicts between contractor and designer
- Lots of parties to sue you (adversarial)
Design-Build
- Designer also builds the project
- Owners issue statement of requirements for project and design-builders offer a price
- *almost always stipulated price contracts
Advantages of design-build to owner
- Construction input into design
- Great cost certainty
- One party responsible limits the number of changes in the middle of the project
- Fastest project completion model (not everything needs to be finalized)
- Great cost control
Disadvantages for design-build to the owner
- Need to define project requirements early
- Loses element of control (more control in design-builders hands)– only recommended for sophisticated owner
- Lose the competitive cost saving benefit of design-bid-build because there are so many unknowns
- Eliminates independent mutual checks between the designer and the contractor—owner now must conduct these checks
Variation of design-build
Turn-key project
Turn-key project
Project with a single contracting entity responsible for returning a fully functional and fully equipped project for what is intended at the time of completion
What are some features of turn-key?
- Builder has rigorous procedures and performance tests they must do
- Builder has complete liability in design
- Further promise that it will be fully equipped and functional for the purpose for which the project is intended
Variation of turn key
Build-operate-transfer
Build-operate-transfer
Design-builder designs and builds facility and then operates it for a specified period of time before transferring it to the owner
Considerations for build-operate-transfer
- Want design-builder with operational experience in this area
- Timing of transfer (fixed or determined based on profits)
Construction management for services (not at risk)
- Have a construction manager who is hired prior to design phase (replaces contractor) who performs additional services for the owner
- At least 3 contracts (owner contracting separately with designer, subs and suppliers)
What does the construction manager fo in Construction management for services (not at risk)
- Conduct constructibility review
- Manages the trade contractors and acts as an agent for the owner
- Provides advice and services, not actively involved in design/construction
- CM has little to no risk
Constructibility review
Process in which the construction manager reviews the project from start to finish identifying obstacles to reduce/prevent errors and prevent delays
Advantages of Construction management for services (not at risk) for the owner
- Faster than design-bid-build
- CM gives advice on design, costing, and scheduling (hired before this takes place)
- Some degree of construction input during design phase with respect of cost and scheduling (fewer changes)
- Gives owner maximum control over construction (direct contractual relationship with each party
Disadvantages of construction management for services (not at risk) to owner
- Maximum control means maximum risk
- Most complicated model to administer (at least 3 contracts to manage at a time)
- Owner retains all cost and schedule risk
- Not as fast as design-build
Construction Management for Services and Construction (At risk)
CM is also the contractor (builder) and is the one entering into contracts with subcontractors and suppliers
Advantages of Construction Management for Services and Construction (At risk) to the owner
- Faster than design-bid-build
- Get some construction input during design
- Less risk—some transferred to CM
Disadvantages of Construction Management for Services and Construction (At risk) to the owner
- Not as fast as design-build
- Owner responsible for coordination conflicts between CM and designer
What is the most common standard form contract?
- CCDC (Canadian Construction Documents Committee)
- Different forms of contracts for different models
Basic format of standard forms
- Agreement
- Definitions
- General conditions
- Supplementary conditions (where the real stuff is)
*contains certain standard provisions
