Construction Contracts

Question 1

What is a Construction Contract?

Answer 1

A private law agreement between

• a person wanting something built (Owner)
• a builder (Contractor)

Question 2

What items are set out in a Construction Contract?

Answer 2

• The work to be performed
• The schedule for the work
• The price for the work
• Other rights and responsibilities of the parties

Question 3

What are the main players in Construction Projects?

Answer 3

• Owner
• General Contractor
• Architect
• Engineers
• Trade Contractors
• Suppliers

Question 4

What are the three main Standard Form Documents for industry in Canada?

Answer 4

• CCDC (Canadian Construction Documents Committee)
• CCA (Canadian Contractors Association)
• MMCD (Master Municipal Construction Documents)

Question 5

why use standard forms?

Answer 5

Question 6

What are the Types of Standard Form Contracts?

Answer 6

• Lump Sum
• Unit Price
• Cost Plus Fee (Negotiated)

Question 7

What is Lump Sum suitable for?

Answer 7

scope and material quantities are well defined. drawings and specs must be complete

Question 8

What are advantages of Lump Sum?

Answer 8

• Owner has price certainty
• Owner knows what the end project will be
• contractor can realize profit if they complete the project at a cost below the fixed price they are payed - incentive to be efficent - contractor may cut corners
• Contractor receives monthly progress payments based on job completion

Question 9

What are disadvantages of Lump Sum?

Answer 9

• very difficult to make changes - deviation delt with through change orders/derectives - expensive and lead to bad relationship
• Complete set of plans required before bidding and construction can begin
• Can be risky to contractors

Question 10

What is Unit Price suitable for?

Answer 10

• Projects where project scope is well defined, but uncertainty in material quantities (vol is known, material is not)
• Projects that can be broken into work items that can be characterized by units
• Often used on highway projects where earthwork and foundation work is predominant

Question 11

What are advantages of Unit Price?

Answer 11

• Allows some flexibility in meeting variations in the quantity of work
• Contractors don’t need to be as precise in their quantity takeoffs since they usually wont lose money as a result of changes from bid quantities

Question 12

What are disadvantages of Unit Price?

Answer 12

• Owner does not have a precise overall cost for the work until it’s complete
• measured field quantities (not bid quantities) are pay quantities, so owner must measure precisely
• Can be manipulated by contractors (unbalancing the bid)

Question 13

unit price price reneogotiation

Answer 13

most unit price contracts allow for price renegotiation if field measured quantities deviate alot from owners bid quantity

Question 14

What deviation in Unit Price Contracts requires renegotiating?

Answer 14

Question 15

deviation underrun

Answer 15

Question 16

What are the four common fee structures of a Negotiated Contract?

Answer 16

• Cost + % of Cost
• Cost + Fixed Fee
• Cost + Fixed Fee plus profit-sharing clause
• Cost + Sliding Fee

higher risk to contractor at bottom, lower risk to owner at bottom

Question 17

cost + % cost

Answer 17

Question 18

cost plus fixed fee

Answer 18

Question 19

cost plus fixed fee plus profit sharing clause

Answer 19

• if contractor brings job under target price the owner shares the savings (commonly 25%) with contractor
• if contractor exceeds target price there are no savings
• rewards contractor who keeps costs to a min
• the target price is agreed upon

Question 20

cost plus sliding fee

Answer 20

Question 21

unit price - balancing/unbalancing the bid

Answer 21

• A/E supplies estimated material quantities as part of bid documents to allow contractors to estimate their price per unit.
• contractor will first distrubute the total indirect cost to each item in proportion to the direct cost of the item/total direct cost. Once indirect costs are added, the sum of each items direct and indirect cost are multiplied by percent profit, and this profit is added to each items cost as well. (divide items cost by units to find $/unit)

unbalancing:
- while keeping total price the same, contractor might shift around unit prices
- this is done to either get paid more for the initial items of work (like mobilization of equipment) or to increase the unit price of items that the contractor thinks will be in higher quantities than the owners A/E estimated (overruns)

all the owner sees is “scheduale of contract unit prices” or “scheduale of approximate quantities and prices”. It shows the A/Es quantity estimates, the contractors unit prices, and total price for each item. This form does not allow the owner to see if the bid has been unbalanced

Question 22

negotiated (GMP)

Answer 22

• in some cases the target price is used to define garunteed max price, price contractor garuntees wont be exceeded
• for contractor to agree to GMP, plans and concepts must be detailed enough to allow reasonable target to be determined
• each additional dollar costs contractor 25 owner 75, reduced arguing

Question 23

what is the target

Answer 23

target cost of the work excluding fee

Question 24

negotiated key factors

Answer 24

• Owner has flexibility to select contractor on a basis other than low bid (experience, reputation, staff availability, and cost)
• Owner invites contractors to review project documents available at time of negotiation
• Documents can be complete or incomplete