Construction Contract Administration for Project Owners

Claude G. Lancome

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351998055
• Edition: 1
• Topic: Architecture
• Subtopic: Architecture General

Construction Contract Administration for Project Owners is aimed at public and private owners of real estate and construction projects. The book is intended to assist owners in their contractual dealings with their designers and their contractors. Most owners are not primarily in the business of designing and building facilities. The fact that their primary business is not design and construction places them at a disadvantage when negotiating, drafting, and administering design agreements and construction contracts because their designers and contractors use these documents every day. This book is intended to assist owners to redress this imbalance by equipping owners to draft and administer contracts so as to protect their interests.

The book is aimed at owner personnel with all levels of knowledge in the business of managing projects. It can serve as a comprehensive introduction to drafting and administering design agreements and construction contracts for beginners. For intermediate level personnel, it can serve as a manual to be read to enhance the reader's skills in this area. For the sophisticated project management professional, it can serve as a resource to be consulted in connection with very specific issues as they arise on a project.

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Project delivery methods

Introduction

Before beginning to draft either the design agreement or the construction contract, the owner should carefully consider its project delivery method. Each method offers certain advantages and challenges to the owner relative to other methods. Because there are a number of available books that address alternative procurement methods in detail, the descriptions in this chapter will briefly summarize the major attributes of each method. The major focus will be the extent to which each method benefits the owner. The chapter includes a discussion of project delivery methods that aim at enhanced collaboration between project participants.

Before discussing each of the specific delivery methods, it is important to discuss one of the most important elements in determining whether an owner–designer and an owner–contractor relationship will work productively. This element is closely associated with the procurement process, and, therefore, it is discussed in this chapter.

Relationship as the basis of procurement

One very key (but by no means the only) determinant of the productivity of a relationship between the owner and the designer, and between the owner and the contractor, is the existence or potential existence of an ongoing, mutually beneficial relationship. It is the ongoing nature of the relationship that is particularly important.

If the owner believes the designer or contractor has done good work for it in the past and is doing good work now, the owner will want the designer or contractor to do more work for it in the future. For that reason, the owner will be flexible when considering proposal or bid values, contract administration issues, and proposed change orders. If the designer or contractor believes the owner has accepted reasonable proposal or bid values, has been reasonable on change order and other issues, and has paid dependably, the designer or contractor will want to do more work for the owner. For that reason, the designer or contractor will be less aggressive when submitting proposals or bids, when preparing change order proposals, and when addressing contract administration issues.

For this type of ongoing relationship to exist and to be the basis of a productive relationship, three conditions must exist. First, the owner has to regularly design and build facilities. Second, the owner has to be able to award design and construction work on the basis of criteria other than, or in addition to, price. Most important is the ability to consider the owner’s previous experience with a design or a construction firm. That is the criterion that allows owners to reject proposals or bids from firms that, in the owner’s opinion, were not reasonable on prior projects. This, in turn, creates a strong incentive for designers and contractors to be reasonable in their approach to proposing or bidding, pricing change orders, and addressing other issues. The third necessary condition is that the personnel responsible for procuring and delivering the project for the owner, the designer, and the contractor, understand the value of a relationship.

The absence of any of these conditions makes it somewhere between very difficult and impossible to derive the benefits of the actual or potential relationship. If the owner only designs and builds a facility once in a great while (say, every five years or so), the interaction between the owner and the designer, and the owner and the contractor, is not frequent enough for any of the participants to consider it a relationship. If the owner can only award on the basis of price, as is the case for many public owners, then the prior experience element cannot be considered and that part of the incentive is removed for the designer and the contractor. If the personnel working for the owner, the designer, and/or the contractor do not value the relationship, then it is very difficult to derive the benefits because decision-making will be made without reference to the relationship.

The importance of a relationship applies to consultants as well. However, these agreements typically involve a very specific scope of service and much smaller agreement values so the importance of the relationship is not as prominent as it is for designers and contractors.

Project delivery methods

The key role of the relationship applies to all the project delivery methods. There are six common project delivery methods that are listed in Exhibit 1.1.

Exhibit 1.1 Most common methods of project delivery

• Design-bid-build.
• Design-build.
• Construction manager at risk.
• Fast track.
• Methods seeking enhanced collaboration (LEAN Construction and Integrated Project Delivery).
• Project management consultants.

Design-bid-build

This method involves selecting a designer who prepares the plans and specifications that fully describe the project to be built. When the contract documents are complete, the project is put out to bid. Contractors interested in building the project submit bids, and the contract is awarded to the qualified bidder that submits the lowest bid.

Design-bid-build provides owners two important benefits. First, because the documents are complete before bids are submitted, the winning bid should reflect reasonably accurately the cost to build the project. To put it another way, because, other than in the case of unforeseen site conditions, there should be no significant unknown aspects of the project, meaning that the winning bid is based on full knowledge of the project, and, therefore, should be reasonably accurate. Also, because all factors are known, it will be difficult for the contractor to justify change orders that do not represent owner-directed changes.

The second advantage for the owner is the checks and balances provided by the design-bid-build approach. The owner has a direct contractual relationship with both the designer and the contractor. They both owe the owner the benefits for which the owner has bargained in each of those contracts. Furthermore, the designer typically has significant contract administration responsibilities which can assist the owner in achieving a successful project.

There are two significant disadvantages that can occur. First, the contractor and the designer can have disputes about what caused problems on the project, each seeking to avoid responsibility. Second, some designers are not skillful at all aspects of contract administration, thereby giving the upper hand to the contractor. This can cause adverse financial consequences for the owner.

Design-build

This method involves procuring one entity to provide both design and construction services. The design may be completed before construction starts, or construction may start before the design is completed.

From the owner’s standpoint, there are two significant advantages to the design-build approach. First, there is a single point of contact and responsibility. The owner has one contractual relationship to manage: the one with the design-build entity.

Either the designer or the contractor can be the lead organization for a design-build team. There is no inherent advantage to the owner in either arrangement. The best team will depend on the strength of the team members in relationship to the needs of the particular project. There are also companies that offer both design and construction services. If the company provides quality services, to have both design capabilities and construction capabilities in the same company can provide further efficiencies in management for the owner.

The second advantage to the owner of design-build is the elimination of conflicts between the designer and the contractor. When problems arise on a project, there are no longer any incentives for the designer and the contractor to point fingers at each other. They are now on the same team and share an incentive to avoid problems.

This points to the major disadvantage for the owner in the design-build approach. There is no longer any check and balance between the designer and the contractor. While the designer and the contractor now share an incentive to avoid problems, they also share an incentive to assign responsibility to the owner for all problems that cannot be avoided. Furthermore, contract administration on behalf of the owner is now performed solely by the owner. Such activities as reviewing requisitions for payment, responding to submittals, and evaluating change order proposals are done exclusively by the owner because the designer is “on the other side.”

Construction manager at risk

There are two types of construction manager. This section discusses construction manager at risk. The section on project management firms discusses the other type of construction manager, construction manager as agent.

There are several differences between the construction manager at risk and the general contractor. It is these differences that offer the advantages to the owner compared to a general contractor.

The major conceptual difference is that a construction manager is supposed to operate on behalf of the owner, as opposed to a general contractor who is supposed to deliver the facility. Construction management contracts typically refer to the relationship between the construction manager and the owner as “a relationship of trust” or similar wording. The construction manager is supposed to protect the interests of the owner while building the facility, whereas the general contractor is only obligated to complete the facility.

The second difference is that a construction manager provides preconstruction services. These include such services as constructability reviews of design documents, value engineering, cost estimating, and construction planning. The construction manager is supposed to work cooperatively with the owner and the designer to develop the best possible project for the owner.

The third difference is that the construction manager usually provides management services only. It does not self-perform work; all the work is performed by subcontractors. This gives the construction manager the ability to focus on managing and coordinating the work.

The fourth difference is the transparency of the cost of the work. The typical construction management contract provides that the construction manager is paid its general conditions (i.e., overhead) costs and its fee. All subcontractor costs are directly passed through to the owner. The general conditions costs and the fee can be stipulated amounts or they can be calculated as percentages of the cost of performing the work (i.e., percentages applied to the amounts paid to subcontractors).

There are no major systemic disadvantages to the owner in the construction manager at risk method of project delivery. There are, however, a couple of potentially serious operational problems. First, the construction manager at risk may not approach its relationship in a less adversarial manner than a general contractor. There are two reasons for this. The first is that there are a number of companies that historically were general contractors that now describe themselves as construction managers. Their orientation toward their relationships with owners hasn’t changed. The second reason is that when construction managers work on projects for owners that only do infrequent construction, they have the same incentives as general contractors to maximize revenues from the project on which they are currently working.

The second operational problem relates to incentives. If the general conditions costs and the construction manager’s fee are to be calculated as a percentage of the cost of performing the construction work, then the construction manager has no incentive to hold down costs, and, arguably, has an incentive to let them rise. Similarly, if change orders to the construction manager’s contract carry a mark-up for general conditions costs and/or fee based on the amount of the change order, the incentives are not consistent with cost control.

Fast track

Fast track refers principally to an approach to sequencing the design and construction work in which construction begins before the design is complete. The fast track approach can be part of the design-build approach and part of the construction manager at risk approach. It cannot be used with the design-bid-build approach which contemplates the designs being complete before bidding begins.

The advantage to the owner of using this approach is that it can potentially save time and therefore save money. That is because the total project delivery time is reduced by allowing the design process and the construction process to overlap. There are two potential risks to this approach that make deciding when to use it a more important decision than is sometimes realized.

The first risk is that work that was already completed will have to be partially or completely done over because of the evolution of the design. The changing nature of the design can arise from owner-directed changes or from the designer refining its thinking. The second risk is that in the rush to complete the design documents, or at least to get some portion of them ready for early bidding packages, the documents will be incomplete. This, in turn, will lead to a larger than expected number of contractor change order proposals, many of which may have merit.

Because of these risks, it is prudent to consider using the fast track procurement method in projects that are familiar to the owner, such as standard, repetitive projects. Examples include owners who build gas stations, hotels, or office buildings that are essentially the same building from project to project. In those circumstances, the standardization of the work should minimize the risks inherent in the fast track approach. Owners who build projects infrequently, and public owners with complicated procurement requirements, should be hesitant about using the fast track approach.

If an owner believes it must use the fast track approach because of serious time, cost, and/or operational constraints, and the project in question is not a standardized, repetitive one for the owner, it should, if at all possible, procure a designer and a contractor that have experience working together. Experience working on a similar type of project is better, and experience working together on a similar type of project for this owner is still better.

The bottom line is that the fast track approach to project delivery places extra management burdens on the designer and the contractor. The owner must be sure its designer and its contractor can meet those burdens.

Methods seeking enhanced collaboration

The owners, designers, and builders of real estate projects have been seeking to reduce ways to reduce conflicts for a number of years. The goal has been to save time and particularly costs that are incurred in resolving disputes. The most costly method of resolving disputes is litigation. The initial effort to reduce costs resulted in a focus on arbitration as a substitute for litigation. As the costs of arbitration rose, the next step was an emphasis on mediation as a way of avoiding the costs of arbitration or litigation. Mediation remains a favorite dispute resolution method for construction projects and is written into many design agreements and construction contracts. Arbitration and mediation represent efforts to streamline the resolution of disputes.

The industry has more recently sought to avoid disputes by encouraging more collaboration from project participants from the beginning of design through construction and occupancy. The first attempt at this approach was partnering. Still in use on many projects, this approach features a facilitated discussion prior to the start of construction at which all the project participants collaborate to establish goals and procedures for the project. Some sessions also jointly discuss project risks. The objective is to align all project participants’ goals and to build a collaborative and respectful project approach. The deliverable in this process is a charter which sets forth the agreed upon goals and is signed by all the attendees to signify their commitment. Some projects have a refresher session during the course of construction. On projects where the contractor is brought on board prior to the start of construction, such as construction manager at risk or design-build, there can be an initial partnering session during design and another session prior to the start of construction.

The author is a certified arbitrator and mediator for the American Arbitration Association (currently on inactive status) and has worked on projects where partnering was employed. Two more recent attempts at developing collaboration are LEAN construction and integrated project delivery, often referred to as IPD. The author has not participated in a project as of this writing where either of the approaches has been used. Therefore, only a very summary description of both is offered.

LEAN construction is focused on maximizing efficiency and minimizing waste in the design and construction of projects. LEAN was originally pioneered in the manufacturing sector and is highly process oriented. It seeks to develop the most efficient way to deliver a design and construction project. The most efficient process has to be determined individually for each project. In order to achieve that objective, there must be a high degree of collaboration among project participants, including the owner, designer, and contractor, and the contractor’s key subcontractors. LEAN can be combined with any other project delivery method, but it works best with methods that allow the owner to involve the contractor in the project while design is ongoing. In most cases, this will mean either construction manager at risk or design-build.

Integrated project delivery (IPD) is another approach that seeks to begin project collaboration during design. It requires bringing the contractor into the p...