The Construction Contract

Question 1

What is the first thing the owner needs to do for a construction project?

Answer 1

Decide what kind of project he wants to do

Question 2

Two ways construction contracts can be categorized

Answer 2

1) On the basis of price and payment scheme (Pricing model)

2) On the basis of their design and finance (Delivery Model)

Question 3

What are the 4 pricing models?

Answer 3

1) Stipulated Price
2) Cost-Plus
3) Time and Material
4) Unit Price

Question 4

Stipulated Price Contracts (aka lump sum)

Answer 4

• Contractor commits to perform specific scope of work for specific price.
• Contractor uses their own means and methods

Question 5

How is price determined for stipulated price contracts?

Answer 5

Price provided by contractor (bidding process)

Question 6

Benefits of Stipulated Price Contracts to the owner

Answer 6

1) Contractor bears all risk of costs and inefficient means and methods
2) Cost certainty
3) Get competitive offers (good price)

Question 7

Disadvantages to the owner for stipulated price

Answer 7

1) Need design finalized in the very beginning phase
2) Owner still bears risk of poor design
3) Complicated to make changes to project because have to change contract

Question 8

Cost-Plus Contract

Answer 8

Contractor paid on the basis of actual costs incurred (cost of work) plus a percentage fee for overhead and profit

Question 9

What does contract lay out in Cost-Plus Contract

Answer 9

• What percentage is (depends on job)

- Detailed and closed list of items that factor into the work

Question 10

Prince Albert Pulp Co v Foundation

Answer 10

• Implied in Cost-Plus Contract duty to prevent wasteful/uneconomic use of labour and materials
• Not duty to get best price, just must be reasonable

Question 11

Benefits of Cost-Plus Contract to the owner

Answer 11

1) Can design as you go, just add to the list
2) Should be able to know early if they are being wasteful
3) Onus is on the contractor to prove reasonableness of costs

Question 12

Disadvantages of Cost-Plus Contract to the owner

Answer 12

Less cost certainty, only certain when project complete

Question 13

Advantage of Cost-Plus Contract for the contractor

Answer 13

1) Specified profit margin that shouldn’t be eaten into

2) Removes budget and cost escalation risk

Question 14

Time and Material Contract

Answer 14

• A version of cost-plus
• Almost exactly like cost-plus but owner responsible for all means and methods
• Contractors just show up, give time and labour, and they bill on that basis
• Owner directs how time and material is divided up

Question 15

Unit Price Contracts

Answer 15

• Used when rates for work are certain but quantities are uncertain
• Every unit of production is allocated a price
• Labour or material given a price
• Total contract price= number of units of that specification multiplied by the price per unit

Question 16

Unit price contracts allow for an adjustment in the unit price if…

Answer 16

• The quantity varies greatly from the estimation
• Industry standard is 20% variation
• Provisions normally say 15%

Question 17

Benefits of this model to the owner

Answer 17

1) Flexibility (don’t need to know exact numbers)
2) Based on actual quantities
3) Complete design not required
4) Allows project to start earlier (don’t need firm quantities)

Question 18

Disadvantage for the Owner

Answer 18

1) Not a lot of cost certainty
2) Need additional staff to measure and report quantities
3) Not usually a contract for an entire project (used for segments)

Question 19

Guaranteed Maximum Price

Answer 19

• For cost-plus, time and material, and unit price, you will have a guaranteed maximum price
• Transfers some risk back to the contractor
• Not the case if items outside the scope (ex: asbestos halfway through)

Question 20

4 Types of Delivery Models

Answer 20

1) Design-bid-build
2) Design-build
2a) Turn-key project
3) Construction management for services (not at risk)
4) Construction management for services and construction (at risk)

Question 21

Design-bid-build

Answer 21

Occurs sequentially

First: designer designs the project
Second: contractors bid on it
Third: chosen contractor builds the project

Question 22

Relationship between designer and contractor in Design-bid-build?

Answer 22

No legal link between them

Question 23

Design-bid-build- duty of care?

Answer 23

Neither owner nor designer owes a duty of care to the contractor to advise it on how to build the project

Question 24

Advantages of design bid build to the owner

Answer 24

• Optimum involvement in design (documents formalized before sent out)
• Allows for competitive pricing
• Most certainty when it comes to cost
• Construction lenders love this (allows peak control and have details at outset)

Question 25

Disadvantages for the owner in design-bid-build

Answer 25

- Project takes longer - No construction input into design - Owner responsible for all risks/costs associated with coordination conflicts between contractor and designer - Lots of parties to sue you (adversarial)

Question 26

Design-Build

Answer 26

- Designer also builds the project - Owners issue statement of requirements for project and design-builders offer a price - *almost always stipulated price contracts

Question 27

Advantages of design-build to owner

Answer 27

- Construction input into design - Great cost certainty - One party responsible limits the number of changes in the middle of the project - Fastest project completion model (not everything needs to be finalized) - Great cost control

Question 28

Disadvantages for design-build to the owner

Answer 28

- Need to define project requirements early - Loses element of control (more control in design-builders hands)-- only recommended for sophisticated owner - Lose the competitive cost saving benefit of design-bid-build because there are so many unknowns - Eliminates independent mutual checks between the designer and the contractor—owner now must conduct these checks

Question 29

Variation of design-build

Answer 29

Turn-key project

Question 30

Turn-key project

Answer 30

Project with a single contracting entity responsible for returning a fully functional and fully equipped project for what is intended at the time of completion

Question 31

What are some features of turn-key?

Answer 31

- Builder has rigorous procedures and performance tests they must do - Builder has complete liability in design - Further promise that it will be fully equipped and functional for the purpose for which the project is intended

Question 32

Variation of turn key

Answer 32

Build-operate-transfer

Question 33

Build-operate-transfer

Answer 33

Design-builder designs and builds facility and then operates it for a specified period of time before transferring it to the owner

Question 34

Considerations for build-operate-transfer

Answer 34

- Want design-builder with operational experience in this area - Timing of transfer (fixed or determined based on profits)

Question 35

Construction management for services (not at risk)

Answer 35

- Have a construction manager who is hired prior to design phase (replaces contractor) who performs additional services for the owner - At least 3 contracts (owner contracting separately with designer, subs and suppliers)

Question 36

What does the construction manager fo in Construction management for services (not at risk)

Answer 36

- Conduct constructibility review - Manages the trade contractors and acts as an agent for the owner - Provides advice and services, not actively involved in design/construction - CM has little to no risk

Question 37

Constructibility review

Answer 37

Process in which the construction manager reviews the project from start to finish identifying obstacles to reduce/prevent errors and prevent delays

Question 38

Advantages of Construction management for services (not at risk) for the owner

Answer 38

- Faster than design-bid-build - CM gives advice on design, costing, and scheduling (hired before this takes place) - Some degree of construction input during design phase with respect of cost and scheduling (fewer changes) - Gives owner maximum control over construction (direct contractual relationship with each party

Question 39

Disadvantages of construction management for services (not at risk) to owner

Answer 39

- Maximum control means maximum risk - Most complicated model to administer (at least 3 contracts to manage at a time) - Owner retains all cost and schedule risk - Not as fast as design-build

Question 40

Construction Management for Services and Construction (At risk)

Answer 40

CM is also the contractor (builder) and is the one entering into contracts with subcontractors and suppliers

Question 41

Advantages of Construction Management for Services and Construction (At risk) to the owner

Answer 41

- Faster than design-bid-build - Get some construction input during design - Less risk—some transferred to CM

Question 42

Disadvantages of Construction Management for Services and Construction (At risk) to the owner

Answer 42

- Not as fast as design-build | - Owner responsible for coordination conflicts between CM and designer

Question 43

What is the most common standard form contract?

Answer 43

- CCDC (Canadian Construction Documents Committee) | - Different forms of contracts for different models

Question 44

Basic format of standard forms

Answer 44

- Agreement - Definitions - General conditions - Supplementary conditions (where the real stuff is) *contains certain standard provisions