Contract Types
Construction Contracts
a. Lump Sum. A lump sum contract is the most basic form of agreement. After the design is complete, the contractor agrees to provide specified services for a specific price after the design is complete. This traditionally takes the longest delivery method. In developing a lump sum bid, the contractor and it's subcontractors will estimate the costs of labor and materials including overhead, profit, and any risk it may foresee and add to it to their price.
b. Guaranteed Maximum Price. Prior to the design being complete, a guaranteed maximum price (GMP) contract is often used whereas the contractor estimates the cost. In this arrangement, contingencies are established and carried as part of the cost. In the event that actual costs are vary from the estimates, the contractor bears the risk or reward. The GMP can be converted to a Lump Sum at a mutually agreed upon point in time during construction if requested.
c. Cost Plus. In a cost plus contract the contractor's profit is set at a fixed amount. If actual costs are lower than the estimate, the owner keeps the savings. If actual costs are higher than the estimate, the owner must pay the additional amount.
Construction Delivery Methods
Construction delivery refers to the relationships between the owner, the contractor, and the designer. There are four primary methods used which include:
a. Design-Bid-Build. The traditional method of building is to have the work designed by a team of architects and engineers and then solicit bids from construction firms. The winning firm becomes the Contractor, responsible for overall completion of the project using a combination of the contractors own forces and its sub-contractors. The design and construction phases of the project are clear and distinct. A complete set of design documents is finished before the contractor becomes involved.
b. Construction Management. The Construction Manager works with the design team (who is contracted directly by the owner) to help ensure that the design is something that can in fact be built for a budget and on schedule. Qualified Subcontractors can be engaged to participate in the design process to ensure the most cost effective method is designed. This can result in a reduction of the total design effort similar to what occurs in Design-Build.
c. Design-Build. In this process the owner selects one contractor to both design and build the project. Design-Build is primarily intended to have a single point of contact for the owner and to save time. Because the designers and contractors work together from the beginning, the design effort can be substantially reduced. It is not necessary to prepare drawings in great detail if the contractor already understands what needs to be done. Time is saved by using a sequentially tendered strategy where the contractor begins working on each phase of the construction as soon as the design for that phase is complete.
d. Project Management/Design Build. This is similar to the Design Build scenario, however the Contractor on behalf of the owner is engaged to mange the entire project. This would include direct liaison with the major stakeholders to ensure the program and scope is properly defined and understood and translating that information to the design and construction team to meet the budget and schedule.
