Construction Management (Contract Types)

• In construction, it is the vehicle for:

A. Allocating risk among the contractor and owner/employer. B. Defining what is to be built. C. Setting the price. D. Defining the time period for construction and completion.

Why Is A Contract Needed?

• Contractor wants the least work for the highest price. • Owner wants the most work for the lowest price.

Construction involves many unknowns - efficiency and good business practices suggest that these unknowns should be managed by the party in the best position to control them as they arise.

The Major Kinds of Contracts

• Fixed price / Lump sum

• Unit Price

• Cost Reimbursable

• Guarantied maximum price

• Target price

Fixed Price or Lump Sum

• Allocates the most risk to the contractor which promises to deliver the work scope for a sum certain

• Contractor benefits/losses based on the difference between the price and cost

• Provides owner/employer with the most certainty

• Objective selection process

• Relies on well-defined project objective

Guaranteed Maximum Price

• Contractor promises to deliver the work scope for no more than the agreed sum certain

• Contractor absorbs the cost of overruns but shares cost savings with the owner/employer

• Transparency in relationship

• Fixed or percentage fee options

• Varying control over final cost

Target Price or Cost

• Contractor and Owner/Employer agree on a price for the work scope and share both overruns and savings

• Blend of lump sum and guaranteed maximum price • Better cost protection for both contractor and owner than lump sum or guarantied maximum price

Cost Reimbursable

• Contractor promises to deliver the work scope for its cost (subcontractors, vendors, self performed work, specified overhead and profit)

• Owner/employer takes all cost risk and has the least cost certainty; provides specified profit and fee for the contractor

• Transparency in relationship

• Least control over final cost