Construction contracts

There are a large variety of contract forms, with the most frequently employed discussed here. Many associations and professional societies develop contract forms that align with the types presented. Therefore the owner is not required to create a new contract form from scratch. Instead, an owner can rely on the structures that have been refined over time incorporating the lessons learned from experience.

 

Stipulated sum

Also called a lump sum or fixed-price contract, is the most basic form of agreement between a contractor and owner. Traditionally this contract follows the design by the architect and engineers and a formal bidding process. It requires that the scope and milestones are thoroughly developed to allow contractors to produce bids. It requires that the contractor agree to be responsible for the proper job execution at a set price. This form places the risk on the contractor to complete the scope of work within the milestones, and bear the responsibility of cost overruns.

 

Cost plus a fee

If the scope of work has not been defined and the owner needs to expedite the process for completion as early as possible, the cost plus a fee is a viable option. The contractor is reimbursed for costs, plus it’s overhead and an agreed-upon profit level. If actual costs are lower than estimated, the owner gets to keep the savings. If they are higher than estimated, the owner must pay the additional amount, unless the cost is capped at a guaranteed maximum price (GMP). If the parties agree to a GMP, it is typically estimated at a point where the scope is sufficiently developed for subcontractors and suppliers to price.

 

Construction Manager as advisor (CMa)

A construction manager is added to the construction team (owner, architect, and contractor) to serve the owner as an adviser and fiduciary. The owner is best served when the CMa joins the owner’s team before the start of design and continues through owner occupancy. Because the CMa is typically paid a fee for its services, which is independent of the project cost (percentage of costs), the CMa’s goals are not influenced by the cost of the project and continuously focuses on reducing costs while maintaining function, and aesthetics.  This approach enhances the level of expertise applied to manage a project.

 

Construction manager as constructor (CMc)

A CMc is similar to a CMa, except that the CM constructs the project rather than only serving as an advisor, expert, and fiduciary.  The CMc combines the functions of contractor and construction manager into a single entity. The CMc may provide a guaranteed maximum price (GMP), and it assumes control over the construction work through subcontractors, and possibly self-performing some of the work. Upon the owner’s acceptance of the GMP through an amendment, typically after the design is complete, the CMc is contractually bound to provide labor and materials to complete the project at or below the guaranteed maximum price.

 

Design Build  (DB)

The owner manages only one contract with a single point of responsibility. The designer and contractor work together from the beginning, as a team, providing unified project recommendations to fit the owner’s schedule and budget.

The design-builder may be a joint venture or a contract between a construction contractor and an architectural firm, or the entity may have both design and construction capabilities within its corporation. The design-build entity is engaged by the owner early with programming and continues through the occupancy phase. This contract can convert to a guaranteed maximum price after the design is complete, which would transfer some financial risk from the owner to the DB entity.  

 

Engineer Procure Construct (EPC)

EPC contracts are commonly utilized to undertake construction works by the private sector on large-scale and complex infrastructure projects. Most Oil and Gas plants are delivered through this option. Under an EPCC contract, a contractor will provide a complete facility to the owner and performs the startup so that the plant or project is ready for operation.  Therefore EPC contracts are referred to as turnkey construction contracts. In addition to delivering a complete facility, the contractor must deliver that facility for a guaranteed price by a guaranteed date, and it must perform to the agreed-upon production. The EPCC contractor coordinates all design, procurement, and construction work and ensures that the whole project is completed as required and in time. It is common for the EPC contractor to self perform a large amount of the work, and therefore typically can control the production without the need to subcontract a majority of the scope.

Value Engineering

Value Engineering (VE) is one of the most effective techniques known to identify and eliminate unnecessary costs in projects.  Value is a fair return or the equivalent in goods, services, or money for something in exchange.  Value can be understood by the formula: Value = Function/Resources.  The function is measured by the performance requirements, and resources are measured in the materials, labor, price, time, etc., required to accomplish that function.  Value Methodology (VM) focuses on improving value by identifying the most resource-efficient way to achieve a function that meets the required performance expectations.

The term VE is used when applying VM to new projects. VE refers to an organized effort to analyze functions of systems, equipment, facilities, services, and supplies to achieve essential functions at the lowest life-cycle cost, consistent with required levels of performance, reliability, quality, and safety.

 

Value Methodology (VM)

VM is not cost-cutting, quality reduction, or a process that can be applied without top management support and the support of all functional disciplines. VM is, however, a process to identify unnecessary costs in a project and to offer alternatives while assuring quality, reliability, life cycle cost, and other critical factors meet or exceed expectations. A VM workshop consists of gathering the required stakeholders and conducting VE sessions that follow six sequential phases.

Phase Name

• Information
• Function Analysis
• Creative
• Evaluation
• Development
• Presentation

 

Information Phase

This phase will take you beyond your present knowledge to a fuller understanding of the complete project being analyzed. It encompasses three techniques, securing the facts, determining the costs, and fixing costs on specifications and requirements.

The project overview consists of identifying the background, purpose, location, budgets, schedule, and also the identities of the designers, owners, contractors, and other stakeholders. It includes an evaluation of the gathered information for the project such as; studies, operations, site issues, material or labor constraints, municipality requirements, front end engineering (FEED), or architectural renderings. Securing the facts focuses on the information of; why, what, when, where, how, and who for the project. The information is placed in worksheets that lead the team through the information gathering exercise.

 

Function Analysis Phase

The purpose of the Function Analysis Phase is to identify opportunities for the improvement of value.  A function describes the purpose or intended use for anything. The purpose of the Function Analysis phase is to identify the most significant opportunities for the improvement of value. We need to ask the questions, what does the function do, and what is the value of the function?

Identify functions – Determine all possible verb-noun combinations that describe the functions of the subject under study (Ex: charge battery, control heat).

Classify functions – Classify the identified functions into basic and secondary. Basic is the specific purpose, and secondary supports the basic. Battery example – basic = deliver energy, secondary = store energy.

Segregate the higher-order functions from the lower order functions, and prioritize them by selecting the functions that have significant opportunity for savings.

Organize the functions by using function analysis worksheets to correlate various types of information with the functions. Use a Function Analysis System Technique (FAST) which displays in logic format deepening the understanding. (see diagrams)

 

Creative Phase

The purpose of the Creative Phase is to generate a large number of ideas or alternates that can perform the essential functions (brainstorm). Withhold judgment for the ideas, and develop as many as possible.

1. What other solutions will perform the function?
2. What else will create the required outcome?
3. Does it need to be performed at all?

Evaluation Phase

The purpose of the Evaluation Phase is to evaluate the options produced in the Creative Phase. Screen the fresh ideas to reduce them to a manageable quantity. Answer the questions for the possibilities.

1. Will the idea achieve the essential function?
2. Will the idea improve value?
3. Is it readily available to implement?

Development Phase

The objective of the Development Phase is to collect additional data, to thoroughly analyze those best alternatives selected during the Evaluation Phase, and to prepare cost estimates and initial designs that will ensure acceptability and ultimate project implementation.

1. Determine sources for additional information. Consult with specialists, suppliers, contractors for additional input, and cost information.
2. Ascertain feasibility of the selected alternatives.
3. Presentation Phase
4. The purpose of the Presentation Phase is to sell your ideas when putting the recommended alternatives before the decision-makers. Answer the questions regarding each value alternative.
5. What are the specific recommended changes?
6. How do they perform the required functions?
7. What roadblocks need to be overcome?

 

Value Policy

Value Policy Statement  (VPS)

It is a visible record of VM acceptance by your organization’s senior management. It signifies acceptance, endorsement, and encouragement and defines the relationships with other departments.

A VPS contains

1. A statement permitting a professional review of the organizations’ products, processes, and services.
2. Guidelines for establishing Value Programs in each division.
3. How Value Methodology will be applied.

 

Value Engineering Timing

The highest return of the VE efforts o

ccur during the early design stages.

 

US Army Corps of Engineers Examples

Federal agencies such as the US Army Corps of Engineers (USACOE) are required to utilize VE per Title 41 §1711 of the U.S. Code. Each executive agency shall establish and maintain cost-effective procedures and processes for analyzing the functions of a program, project, system, product, item of equipment, building, facility, service, or supply of the agency. The analysis shall be—performed by a qualified agency or contractor personnel; and Directed at improving performance, reliability, quality, safety, and life cycle costs.

The federal Office of Management and Budget in its OMB Cir A-131 requires federal agencies to consider and use VE as a management tool to ensure realistic budgets, identify and remove nonessential capital and operating costs, and improve and maintain acceptable quality in program and acquisitions functions. For new projects and programs, VE shall be required for new agency projects and programs when the project cost estimate is at least $5 million or such a lower threshold as determined by the SAO and identified in the agency’s VE guidelines.