THE PARTIES TO CONSTRUCTION-RELATED PRIME CONTRACTS

1. THE PARTIES TO CONSTRUCTION-RELATED PRIME CONTRACTS Construction-related prime contracts involve owners, architect/engineers, construction managers, and construction contractors. The owner typicallycontracts with one of the others, depending on the particular purpose to be accomplished by thecontract. • Owner-Architect Contracts and Owner-Engineer Contracts Architect/engineers (A/Es) are entities that typicallydesign projects, prepare drawings and specifications for the construction contract,and in some instances perform field inspection services and administration of theconstruction contract. Architectural Firms and engineering firms provide similartypes of services. The difference between them is that architects deal with residential,commercial, and institutional buildings, whereas engineering companies dealwith engineered structures such as highways, dams, bridges, tunnels, and heavyindustrial buildings and structures. Prime contracts between owners and architectsare called owner-architect contracts, whereas such contracts with engineers arecalledowner-engineercontracts. .

2. Owner-ConstructionManagerContracts Construction managers (CMs) are distinctly different entities from A/Es, theirrole 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-ContractorContracts Thefourth 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.

3. THE NATURE OF THE CONTRACTUAL SERVICES PROVIDED Design OnlyServices • 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 andspecificationsis a necessary part of the design process. Designonly is normalyunderstood to include the preparation of a complete set of drawings and specificationsused to secure bids and to construct the project. • Design only contracts may alsoinclude assisting the owner in obtaining and evaluating bids for the purpose ofawarding a construction contract, providing general inspection services during constructionand providing monthly certified estimates of construction work satisfactorilyperformed.These estimates are the basis of monthly progress payments and finalpayment to the construction contractor. • Such contracts seldom require continuouson-site presence of the designer during construction or exhaustive site inspections toensure compliance with the drawings and specifications. Only such inspection servicesnecessary to reasonably assure general compliance are normally requiredunder a design only contract.

4. CONSTRUCT ONLY SERVICES • The second obvious kind of contractual service is construct only, pertaining toowner-contractor contracts. Thisis 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-constructcontracts.

5. DESIGN-CONSTRUCT SERVICES - D/C or D/B Hybridform of contract has become prominent, where the contractualservices of design only and construct only contracts areincorporated into design/construct ordesign-build contracts. In this form of contract,the architectural or engineering design work, creation of the drawings andspecifications, 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/constructservices as joint ventures or by using a subcontract to provide part of therequired services. • An AlEmay form a joint venture with a construction contractoror enter into a subcontract with construction contractor for the construction portionof the overall project. More commonly reciprocal arrangements are made withthe construction contractor in the lead role

8. 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, butit would not be a turnkey contract. If the contractor also furnished the equipmentitems just listedthe design-construct contract would also be a turnkey contract.All turnkey contracts are necessarily design-construct, but many design-construct

9. FAST TRACK CONTRACTS • A fast-track project is one in which the construction phase is started at apoint when only limited design work has been completed. For example, site gradingand structure excavation begin when foundation design work is complete, butdesign work for all subsequent elementsof the project, although in progress, isincomplete. This approach has the obvious advantage-on paper, at leastshortening the overall delivery period for the completed facility (Concurrent design and works). • Since "time is money," fast-track project delivery offers considerable potentialsavings to an owner. However, several severe risks accompany the fast-trackthefast-track approach that can erode the potential savings. Theforemost risk is that after constructionis in place a problem may develop with subsequent design that requirescostly and time-consuming changes to work already completed. • At the very least,the owner loses the flexibility to make relatively inexpensive changes reflectingnew and unexpected requirements, an advantage enjoyed throughout the designphase of a non-fast-track project. • Sometimes the fast-track approach is used when the design and constructionentities are not the same. each operating under separate contracts with the owner.Itcreates even greater risk for the owner, particularly if the design phase is notcarefully managed. Errors, changes, or delays in design that impact construction arealmost certain to result in claims from the construction contractor for additionalcompensation and time for contract performance.

10. CONSTRUCTION MANAGEMENT SERVICES • The final type of contract service involved in construction-related contracts is constructionmanagement, pertaining to owner-constructionmanager contracts. A distinctionshould be made between this use of the term construction managementasan administrative service performed for an owner and the meaning of that term as itrelates to the direct management of construction operations by a construction contractor'sorganization. • Although many of the same professional qualifications arerequired, the two activities are distinctly different. When services are being furnished on a construction management contract, theconstructionmanager (CM) normally furnishes purely professional services as an agent of the owner and doesnot perform significant actual construction work-that is, an agency relationship iscreated between the CM and the owner.

13. CM CONTINUED • Although performing no actual construction,theCM may provide such "general conditions" items as utilities, sanitary services,trashremoval, and general elevator or hoisting services for the benefit of theconstruction contractor or contractors. TheCM's role as a provider of professionalservices is not unlike that of the AlE, who also provides professional services withthe aim of serving the owner's interest. • CMs may be involved in the very early stages of a project, even the predesignphase, to assist the owner in planning the project and in preparing a predesign conceptualestimate of the probable project cost. • This involvement may continuethrough the design and preparation of the contract documents phase, where the CMwill provide constructability advice, evaluations of alternate designs, and assistancein obtaining and evaluating bids for the construction of the project.During construction,the CM provides general administration authority, performs inspectionservices to ensure compliance with the plans and specifications, and assists in closingoutthecontract.

14. CM CONTINUED • A CM acting as the owner's agent is normally precluded from performing anyactual construction work. However, in one form of CM contract, the agency relationshipis partly replaced by the more normal owner-construction contractor relationship,wherethe CM's interest is separate from the owner's. Under this form ofCM contract, the CM is part general contractor and does perform part of the constructionwork in addition to previously described CM services. • Although both entities are agents of the owner, CM and AlEservices areessentially different. • Figure 3-2 compares typical AlEand CM services. An AlEwhohas designed the project may also serve the owner as a CM. The same AlEentitymay have two separate contracts with the owner, one for design services andanother for CM services, or a single contract that provides for both.

18. COMMERCIAL TERMS • Another major difference in construction-related prime contracts centers on commercialterms, This part of the contract establishes the method of payment to theparty providing the services and defines where the financial risk of performance lies. • The two broad classes of commercial terms for construction-related contracts arecost-reimbursable terms (cost-reimbursable contracts) and fixed-price terms (fixedpricecontracts). • A cost-reimbursable contract is one performed almost entirely onthe owner's funds. As the provider of the contract services incurs costs in providingthe services, the owner periodically reimburses the provider for these incurred costs,usuallyon a monthly basis. The provider thus has little or no funds tied up in thecontract and the payments received from the owner are directly dependent on thecosts of the services provided. In contrast, there is no relation between the costs thatthe provider of services may be incurring and paymentreceived from the owner onfixed-price contracts.

19. COMMERCIALTERMS 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 ina 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 PriceTerms • Fixed-PriceContracts

20. COST PLUS PERCENTAGE FEE TERMS Thesimplest form of cost-reimbursable commercial terms is the cost plus percentagefee(CPPF) basis of payment, sometimes referred to as a cost plusor a time and materials basis. Many owners -A/E andand owner-CM contracts operate on this form asdo many small construction contracts. The owner agrees to reimburse the costsincurred by the provider of the services and, in addition, to pay a fee equal to a fixedpercentage of incurred costs that is stipulated in the contract. Aside from the practiceof professionalism and the desire of the provider to protect his or her reputationfor fair dealing in order to secure additional business, there is no incentive forthe provider to control costs. Theoretically, the more money spent, the more earned.In the case of construction contractsthis form of commercial terms has a particularlygreatpotentialfor abuse.

21. 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, asthe most probable cost of providing the contemplated services. A fee as payment forthe services is also agreed to, basedon the magnitude of the target estimatewiththe provisionthat the parties will share the benefits or penalties of any underruns oroverruns in the actual costs incurred in providing the services compared to the targetestimate. • Theexact formula for the sharing of the underruns or overruns mustalso 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 oroverruns 50-50. It is not unusual for the provider of services to insist that the formulaset a cap on the provider's share of any overruns, the cap usually being equalto the amount of the agreed-upon fee. In all of the previously discussed forms ofcommercial terms, the provider of the services bears none of the financial risk. • In the target estimate arrangement, however, the provider doesassume part of this risk, depending on the exact formula agreed upon. Ordinarilythe target estimate approach requires that fairly definitive information about theservices to be provided be known at the onset. As a result, the target estimate willbe 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.

22. GUARANTEED MAXIMUM PRICE TERMS • Another form of cost-reimbursable commercial terms is the guaranteed maximumprice (GMP) arrangement. Thisform is similar to thetargetestimate form in thatthe parties agree on an initial estimate for the cost of the contemplated services andon a fee for the provider based on this estimated cost. • The agreed-upon estimate forthe cost of providing the services and the agreed-upon fee, usually along with anallowance for contingencies, are then added together to yield the guaranteed maximumprice 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 theservices as they areincurred and makes pro rata payments of the agreed-upon fee as would be the casefor CPFF and target estimate contracts. • The difference is that once the owner haspaid out funds equal to the GMP no further payment is made. The provider mustthen continue to perform at his or her own expense until all of the agreed-upon serviceshave been performed accordingto the contract terms. If a point is reachedwhen all services have been provided according to the contract terms and theowner's financial outlay is less than the GMP, the owner receives the total benefit ofthe savings. TheGMP form of commercial terms has gained enormous popularity inrecent years, particularly for contracts in the field of residential and commercialbuilding construction. Obviously, unless the GMP is set at an inflated level comparedto a reasonable estimate of the cost of providing the servicesthe providerassumes a considerable risk of performance under this form of commercial terms.

24. COST PLUS FIXED FEE TERMS • Because of the potential for abuse of cost plus percentage fee terms, the cost plus fixedfee (CPFF) form of commercial terms evolved. This form of payment is oftenused in federal government contractsfor military-related construction when war orthe threat of war has created conditions where firm pricing is not feasible. • It is alsobroadly used for owner-A/E and owner-CM contracts and for private constructioncontracts when for one reason or another the drawings and specifications are notdefinitive enough to permit firm pricing. In this form of commercial terms, theowner reimburses all of the service provider's costs and pays a fee that is fixed atthe beginning of the contract. This fee will not change unless the scope of the servicesprovided is expanded by change order to the contract. • The determination ofthe fee is usually based on an estimate of the probable cost of the services to be providedor, sometimes in the case of owner-A/E or owner-CM contracts on a percentageof the estimated construction cost of the project involved that is agreed toby the parties prior to entering into the contract. Thisform of commercial termsensures that, if the costs overrun the original estimate without a change in scope, theprovider of the services will not benefit by an increased fee as is the case under CPPF terms.

25. FIXED-PRICE CONTRACTS All of forms of commercial terms apply to cost-reimbursable contractsituations. Otherbroad class of contract is the fixed-price contract, alsocalled a firm-price contract, or sometimes a lump sum, or hardmoney contract. • Allfour terms mean that the provider will be paid an agreed fixed price for providingthe contractually stipulated services. Thereis no relationship between the paymentreceived from the owner and the costs incurred by the provider. • The financial risk ofperformance is borne entirely by the provider of the services. Fixed-price commercialtermsrequire a particularly definitive mutual understanding of the scope of servicesto be provided. • In the case of construction contractssuch an understanding isdifficult to attain unless a complete and accurate set of plans and specifications isavailable, upon which the fixed price can be determined and agreed.

27. 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 performeror provider assume the entire financial risk of performance, that performeris taking a far greater risk than under other commercial terms. It follows that theprovider is entitled to greater profit than would be the case if less risk wereassumed. The profit potential in fixed-price contracting is much greaterthan for other forms of contracting, particularly for construction contracts. Thefixed-price or hard money contract is the traditional form around which today'sconstructioncontractingindustryevolved

28. FIXED-PRICE CONTRACTS continued Fixed-price contracts in construction take one of two different forms: • The firstis a true lump sum contract, where payment is made in a total fixed monetaryamount called the lump sum contractprice. Usually, a breakdown of the lump sumprice agreed to by the owner and the contractor is used as the work progresses todetermine the appropriate part of the lump sum price to be paid monthly for workperformed that month.Thesum of the monthly payments will equal the lump sumcontract price. Unless the scope of the work specified in the contract is changed thelump sum price will not change. • Thesecond 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 discreteelement of the project work. Each bid item contains a title or name thatdescribes the particular element of work involved, an estimated quantity and unit ofmeasurement 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 priceand the estimated quantity of units of work.

29. Example: • Figure 3-3 illustrates some of the comparative consequences of previously discussedforms of commercial terms.Thetable is constructed around the performanceof a hypothetical project with an assumed estimated cost of $15,000,000, representingthe best estimate possible at the time the contract was signed. • Thetable indicatesthe 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 ofcommercialtermsillustrated.

31. TYPICAL DOCUMENTS COMPRISING THE CONTRACT Fixed-price, competitively bid contracts are comprised of certain, fairly typical documents Themajor categories of mostcontracts 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 • SupplementaryConditionsofContract • Specifications • Drawings • Reports of investigations of physical conditions Some contracts may not contain allof these categories but, with the exception ofone-of-a-kind contracts, none is likely to contain material that won't logically fit intooneoranother.

32. BiddingDocuments • The first category, bidding documents, normally begins with an advertisement.The back section of contemporary industry periodicals,contains a plenty of bidadvertisements.The advertisement identifies the project for which bids aredesired, the owner, the time and place of the bid opening, and instructions to potentialbidders on how to obtain a full set of contract documents. • Thesecond document in the bidding group is usually the Invitationfor Bids(IFB) or, sometimes, a Requestfor Proposals (RFP). Thegovernment andsome other owners use the IFB when bidders must strictly conform to the drawingsand specifications and the RFP when bidders may propose variations for the project. • Both typically include the following: • A description of the contract work • Theidentity of the owner • The place, date. and precise time of the bid opening • Thepenal sum of the required bonds (bid bond, performance bond, andlabor and materiál payment bond