Modern contracting arrangements offer a number of ways to deliver a project to the owner, including design-build, construction management and traditional design-bid-build methods. Standard forms utilizing these delivery strategies are offered by the American Institute of Architects (AIA), ConsensusDocs, the Design-Build Institute of America (DBIA) and the Engineers Joint Contract Documents Committee (EJCDC). Although this article focuses primarily on owner-contractor arrangements, each of these sources also offers a range of consulting and subcontracting forms to subscribers. The first step in selecting the right form is to determine exactly how the project will be delivered to the owner.
If a single entity will be largely responsible for both designing and constructing the project, either through its own personnel or by hiring outside consultants, a design-build form is appropriate. Design-build forms provide the owner with one-source responsibility for design and construction. The design-builder may be a design firm, a building contractor or a joint venture between the two. Design-build forms are available from AIA (A series 141, 142 and 145), ConsensusDocs (400 Series), DBIA (500 Series) and EJCDC (D series).
II. Construction Management
Alternatively, the owner may opt to have its architect or engineer provide the design, but seek substantial input from the contractor during the preconstruction phase regarding materials, constructability, cost and value engineering. Afterward, the contractor may also act as an owner’s advisor during construction, or contract with the owner to complete the construction itself. Under these circumstances, the contractor is acting as a construction manager, either as an advisor only, or as the constructor. These circumstances dictate the use of an appropriate construction management form available from AIA (A series 132, 133 and 134), Consensus (800 Series) or EJCDC (500 Series).
Should the project follow a more traditional path, the owner may work exclusively with a design professional to develop a complete design package. The owner may then put the package out to bid and select the contractor with the most attractive bid package. In this scenario, the parties should consider a traditional bid-build contract available from AIA (A series 101-105, 110-112 and 121) or Consensus (200 and 700 Series).
Forms available for each project delivery method are designed to offer different pricing options. The most common arrangements are cost-plus, with or without a guaranteed maximum price, and fixed fee.
Design-build and construction management projects are almost always priced on a cost-plus basis. Cost-plus agreements are also referenced as “open book” contracts because the owner has the right to review and audit all of the contractor’s costs. This method requires the owner of the project to pay the contractor’s actual costs of completing the work, plus a fee which is fixed or, more often, based on a percentage of cost.
- Guaranteed Maximum Price
Cost-plus agreements may also set a GMP or guaranteed maximum price for the particular scope of work to be completed. In setting the GMP, the contractor guarantees the owner that the total cost of the work will not exceed the guaranteed amount. The GMP is a “not to exceed” value, not a fixed price. Unfortunately, this concept is often misunderstood. Contractors regularly make the mistake of treating the GMP as a fixed price rather than a maximum price.
The GMP is not a fixed price. The Contractor cannot bill the owner any more than the actual cost of the work, plus its fee. If this total turns out to be less than the GMP, then the lesser total is all that can be billed. Although it is perfectly appropriate to use the GMP to create a schedule of estimated values for early billing, the schedule must be updated regularly to reflect reality. Toward the end of the project, costs must be fully reconciled to make sure that the owner is billed only for actual costs plus the contractor’s fee or, in the alternative, the GMP – whichever is less.
Where the contract sets a GMP, the owner can also provide an extra incentive for the contractor to control costs. This is achieved by allowing the contractor to share in any savings realized relative to the GMP. Savings is the delta between the GMP, and the total costs and fees billed to the Owner for the project. The owner can agree to share savings with the construction manager in any percentage that makes sense under the circumstances. Savings is paid to the contractor as part of its final payment application.
- Guaranteed Maximum Price
- Fixed Fees
By contrast, bid-build contracts generally carry a fixed price which the contractor guarantees to the owner for completing a well-defined scope of work. Unlike cost-plus arrangements, bid-build arrangements are not open book. Once the owner accepts the price offered, it has no right to audit the contractor’s costs or expenses. It simply accepts the price as bid. The contractor then realizes all of the savings generated by controlling costs.
V. Master Agreements
More recently, construction players are using master agreements to contract with repeat customers, contractors and vendors. Instead of executing a new contract for each project, a single master agreement is executed, containing all of the general terms, conditions and boilerplate that would typically appear unchanged in every contract. Each time a new project is assigned and accepted, the master agreement provides for the issuance of a work order which contains the variable terms of each project, including price, scope, timing, payment frequency, retainage, insurance and others. If special circumstances require the parties to amend a term of the master agreement for a particular job, this also can be accomplished in the work order.
Master agreements save time and duplication of effort by allowing the parties to fully negotiate their terms only periodically. Afterward, only the work orders must be reviewed and signed by the parties. Master forms typically set a term during which the agreement is effective so that terms can be renegotiated at reasonable intervals. Master forms are offered by AIA (A series 121, B series 121 and C series 421), Consensus (700 series) and EJCDC (500 series).
VI. The Bottom Line
No matter what arrangement you have in mind, there is likely a standard form that can be a starting point for you. Although all of the forms have made great strides moving away from one-sided drafting, keep in mind that each set of forms is written from the perspective of a different player in the process. AIA forms tend to focus on the interests of the owner and architect. ConsensusDocs are centered more on contractor interests. EJCDC documents are written from the perspective of the engineer and its relationship with both the owner and contractors. Depending on your role in the project, one may be more appropriate for you. Should you have questions about which form is right for you, consult with your counsel for more information. Good luck out there!