Construction Contracting

A Practical Guide to Company Management

Richard H. Clough, Glenn A. Sears, S. Keoki Sears, Robert O. Segner, Jerald L. Rounds

• Publisher: Wiley
• Year: 2015
• ISBN:
  9781119025429
• Edition: 8
• Topic: Technology & Engineering
• Subtopic: Civil Engineering
• Index: Technology & Engineering

The definitive contracting reference for the construction industry, updated and expanded

Construction Contracting, the industry's leading professional reference for five decades, has been updated to reflect current practices, business methods, management techniques, codes, and regulations. A cornerstone of the construction library, this text presents the hard-to-find information essential to successfully managing a construction company, applicable to building, heavy civil, high-tech, and industrial construction endeavors alike. A wealth of coverage on the basics of owning a construction business provides readers with a useful "checkup" on the state of their company, and in-depth exploration of the logistics, scheduling, administration, and legal aspects relevant to construction provide valuable guidance on important facets of the business operations. This updated edition contains new coverage of modern delivery methods, technology, and project management.

The field of construction contracting comprises the entire set of skills, knowledge, and conceptual tools needed to successfully own or manage a construction company, as well as to undertake any actual project. This book gives readers complete, up-to-date information in all of these areas, with expert guidance toward best practices.

• Learn techniques for accurate cost estimating and effective bidding
• Understand construction contracts, surety bonds, and insurance
• Explore project time and cost management, with safety considerations
• Examine relevant labor law and labor relations techniques

Between codes, standards, laws, and regulations, the construction industry presents many different areas with which the manager needs to be up to date, on top of actually doing the day-to-day running of the business. This book provides it all under one cover – for the project side and the business side, Construction Contracting is a complete working resource in the field or office.

Chapter 1
The Construction Industry

1.1 Introduction

The construction industry is very large by any standard, and it can be described and defined in a number of different ways. This chapter will begin to characterize the industry in terms of its size and economic impact, and will proceed to define by name and by function some of the practitioners who perform their professional work in the industry. Also to be examined are terminology relative to types of contracts, public and private; single and separate contracts; competitive bid and negotiated contract formation; different project delivery methods; different types of construction contractors; and various types or categories of construction projects. All of these are vantage points from which the construction industry can be observed, and all of these terms provide descriptors for various aspects of the professional practice of construction contracting in the industry.

1.2 The Construction Project

Humans are compulsive builders who have demonstrated throughout the ages a remarkable and continually improving talent for construction. As knowledge and experience have increased, the ability of humankind to build structures of increasing size and complexity has expanded enormously. In the modern world, everyday life is maintained and enhanced by an impressive array of construction of all kinds, awesome in its diversity of form and function. Buildings, highways, tunnels, pipelines, dams, docks, canals, bridges, airports, and a myriad of other structures are designed and constructed so as to provide us with the goods and services we require. As long as there are people on earth, structures will be built to serve them.

Construction projects are complex and time-consuming undertakings. The structure to be built must be designed in accordance with applicable codes and standards, culminating in working drawings and specifications that describe the work in sufficient detail for its accomplishment in the field. The building of a structure of even modest proportions involves many skills, numerous materials, and literally hundreds of different operations. The assembly process must follow a certain order of events that constitutes a complicated pattern of individual time requirements and sequential relationships among the various segments of the structure.

Each construction project is unique in its own way, and no two are ever quite alike. Each structure is tailored to suit its environment, designed and built to satisfy the needs of its owner, arranged to perform its own particular function, and designed to reflect personal tastes and preferences. The vagaries of construction sites and the infinite possibilities for creative and utilitarian variation of the structure, even when the building product seems to be standardized, combine to make each construction project a new and unique experience. The designer produces a design for each project to meet the needs of the owner within the constraints of the owner's budget. The contractor sets up a production operation on the construction site and, to a large extent, custom-builds each project.

The construction process is subject to the influence of numerous highly variable and often unpredictable factors. The construction team, which includes various combinations of contractors, owners, architects, engineers, consultants, subcontractors, vendors, craft and management workers, sureties, lending agencies, governmental bodies, insurance companies, and others, changes from one project to the next. All of the complexities inherent in different construction sites, such as subsoil conditions, surface topography, weather, transportation, material supply, utilities and services, local subcontractors, and local labor conditions, are an innate part of the construction project.

As a consequence of the circumstances noted above, construction projects are typified by their complexity and diversity, and by the nonstandardized nature of their design and construction. Despite the use of prefabricated units in certain applications, it seems unlikely that field construction can ever completely adapt itself to the standardized methods and the product uniformity of assembly-line production.

1.3 Economic Importance

For a number of years, construction has been the largest single production industry in the American economy. It is not surprising, therefore, that the construction industry has a great influence on the state of this nation's economic health. In fact, construction is commonly regarded as the country's bellwether industry. Times of prosperity are accompanied by a high national level of construction expenditure. During periods of recession, construction is depressed, and the building of publicly financed projects is often one of the first governmental actions taken to stimulate the general economy. When the construction industry is prospering, new jobs are created, both in direct employment in construction, as well as in related industries, such as materials and equipment manufacturing and supply. A high level of construction activity and periods of national prosperity are simultaneous phenomena; each is a natural result of the other.

Some facts and figures pertaining to construction in the United States are useful in gaining insight into the tremendous dimensions of this vital industry. The total annual volume of new construction in this country at the present time is approximately $1.75 trillion. The annual expenditure for construction normally accounts for about 10 percent of the dollar value of our gross domestic product. Approximately 80 percent of construction is privately financed, and 20 percent is paid for by various public agencies. The U.S. Department of Labor presently indicates that construction contractors directly employ more than 7 million workers during a typical year. If the production, transportation, and distribution of construction materials and equipment are taken into account, construction creates, directly or indirectly, about 12 percent of the total gainful employment in the United States.

1.4 The People Involved on a Construction Project

Construction projects are designed and built through the combined efforts of a number of people. Each has a defined role and a set of accompanying responsibilities in the total effort. These roles, as well as the rights and responsibilities of those who participate in the process, are defined in contracts that are formed between the various participants.

While the construction industry is often described in terms of materials, such as concrete, steel, masonry, and many others, or in terms of project delivery systems and contracting methods, it can also be typified in terms of the people who interact in the process which results in a completed project. It is the people who are involvd in the design and construction of a project who bring the project to fruition. Construction contracting can therefore best be characterized as a people-oriented business and profession.

1.4.1 Owner

The owner is the central figure in any construction project. The owner can be defined most directly as the person who will own—literally will have title to—the project upon its completion. The owner is also the person who will pay for the design and construction of the project.

It is the owner who initiates all that will follow in the design and construction processes. The inception of any construction project begins with the owner's recognition of a need for a constructed project, whether it be a new building or an expanded or renovated building or a facility such as a highway, industrial plant, or airport. Most owners perceive this need and refine its ramifications over a period of time, until at some point the decision is made to move forward with the idea.

Typically, the owner will next think in terms of financing—how much money he is willing or able to commit to satisfy this need. Additionally, the source of these funds is considered and analyzed. Determinations are made regarding whether the forthcoming project will be funded with owner's funds or with borrowed capital. Most owners will make at least a preliminary determination during the course of this process, with regard to the maximum number of dollars the owner is willing or able to spend for the design and construction that will satisfy the need that has been perceived. This value will become the owner's budget for the project.

Most owners will next seek the services of a design professional—an architect or engineer. The owner will look to this person to assist with defining and codifying, in detail, what the owner's needs are. Then the owner will expect the designer to produce a design that will satisfy the needs of the owner, within the constraint of the owner's budget.

Various methods are employed by owners to determine who the designer will be. The owner may have a familiarity, or a history of past performance, with a certain designer or design firm. Alternately, the owner may seek input from peers and acquaintances regarding competent design firms. Sometimes, the owner may stage a design competition, whereby he sets forth the parameters of his need, and invites design professionals to submit designs in competition with one another for selection by the owner to design the project. These and other methods of the owner's choosing the firm that will produce the design are further discussed later in this book.

It is important to note that the owner will select a design firm and then will enter a contract with that firm. The contract will set forth the exact nature of the services that the designer will provide, and will contain provisions relative to determination and payment of the designer's fees, along with defining all of the administrative elements of the agreement between these parties, as well as the rights and obligations of the two parties. The existence of an actual contract between two parties is referred to as their having privity of contract with each other. The concept of who has privity of contract with whom on a typical construction project is further discussed in succeeding sections of this chapter. Likewise, details regarding the typical content of the contract between the owner and the designer will be further discussed in another chapter. The most common relationship between the owner and the architect-engineer, as well as the names of the other parties most commonly involved in the design and construction of a project, and who has privity of contract with whom, are illustrated in Figure 1.1.

Figure 1.1 People Involved and Hierarchy of Contracts on a Typical Building Construction Project

Owners may be characterized as being private owners or public owners, and the construction projects that are designed and constructed for them are described in the same terms. Private owners may be individuals, partnerships, or corporations. The funds that are used to pay for the design and construction of the project are private funds, that is, not public or government funds. Most private owners have structures built for their own use: business, habitation, pleasure, or otherwise. However, some private owners do not intend to become the end users. Such owners intend that the completed structure is to be sold, leased, or rented to others.

Public owners are defined as some level of government—national, state, county or parish, municipal, or school district—or some agency or department of government. Public owners range from agencies of the federal government down through state, county, and municipal entities, to a multiplicity of local boards, commissions, and authorities. Construction projects that are designed and constructed for public owners are defined as public projects. Such projects are paid for by appropriations, bonds, tax levies, or other forms of public funding, and are designed and built to meet some defined public need. Public owners are required to proceed in accordance with applicable statutes and administrative directives pertaining to all aspects of the design and construction process.

Most owners relegate by contract the design of their projects to professional architecture or engineering design firms, and award contracts for the construction of their facility to construction contractors. However, there are some owners who, for various reasons, elect to play an active role in the design and/or the construction of their projects.

For example, some owners perform their own design, or at least a substantial portion of it. In similar fashion, some owners choose to act as their own construction managers or perhaps even to perform their own construction. Many industrial and public owners have es...