This is an abbreviated version of the original text. Click here to download Don’s original piece on Construction Delivery Methods.
Every project or service Nabholz performs for clients, from a large building project to a small electrical job, begins with a contract. In the construction industry, there is no shortage of contract types from which to choose. This menu of choices is known as construction delivery methods or project delivery methods or alternative delivery methods or project delivery formats.
It’s important to select the right contract from this “menu” for a specific project. The right contract meets the needs of the client and reduces risk to the contractor, thus lowering costs to the client and delivering the best value. We tend to recommend the use of an industry-standard form of contract. This approach minimizes misunderstanding, speeds up the contract negotiation process, and reduces risk to the parties.
When choosing from construction delivery methods, it’s important to know some contract basics. The primary “basis” of a contract format refers to how the contractor or service provider is paid.
- Lump Sum, also known as Stipulated Sum or Fixed Price, is a common basis. The client agrees to pay the contractor a specified dollar amount for the project scope.
- Unit Price basis is a variation of Lump Sum. The client agrees to pay the contractor a specified unit price amount for listed work activities (e.g., $10/square yard of asphalt paving or $60/hour of crane service).
- Cost-Plus, also known as Cost of the Work Plus a Fee, Cost +, or Time and Material, is another common basis. The client agrees to pay the contractor for their actual costs to perform the project, plus a specified amount for their overhead and profit, often referred to as Fee or Contractor’s Fee. It’s necessary to address allowable actual costs. It is common to address costs paid by the client, sometimes referred to as Reimbursable Costs or Reimbursable Expenses, and costs included in the Contractor’s Fee, sometimes referred to as Non-Reimbursable Costs or Non-Reimbursable Expenses. Additional contract sections are necessary to address how the fee is calculated, accounting and records keeping requirements, and the right of the client to audit such records. We often refer to this arrangement as open book.
- Guaranteed Maximum Price, also known as GMP or Price Not to Exceed, is a component commonly incorporated in a Cost-Plus basis contract. In such cases, the GMP is the maximum total dollar amount the client will pay to the contractor for both the actual costs of the project and Contractor’s Fee. If there are any savings under the GMP, the client may retain all savings, or client may split savings with the contractor as added incentive (determined by terms of the contract).
A secondary basis may be the role of the party under contract with the client.
- General Contractor, or GC, implies a role where other parties design and define the scope of the project and the GC prepares a proposal to execute that project. The GC has discretion over specialty contractors and suppliers they may employ to accomplish the project.
- Construction Manager, or CM, implies a role with more responsibility in managing the project planning process for the client. In most cases, the client employs the CM early in the design phase or before the design phase begins. The CM works with the client and/or the client’s design firm prior to the construction phase. The CM may assist or advise with designer selection, site selection and evaluation, schedule and construction phasing, feasibility of building components and systems (i.e. Constructability), conceptual budgeting and estimating, cost/payback studies (i.e. Value Analysis, Value Engineering, Life Cycle Costing), and input from certain specialty contractors and suppliers. We refer to this phase as Preconstruction Services. Once the project scope is adequately defined, the CM solicits pricing from specialty contractors and suppliers, performs detailed estimating, and prepares a proposal to construct the project as Construction Manager/General Contractor, or CM/GC.
- The role of Construction Manager may be further refined by the level of project performance risk they assume. Construction Manager at Risk, or CM at Risk, implies that the CM is responsible by contract to perform the scope of the project. Construction Manager as Agent, also known as CM Agency or Agency CM, implies that the CM is providing a professional service (i.e. consultant) to the client for the project. Professional services may include Preconstruction Services, facilitating prime contracts between the client and other contractors to perform the project, and providing oversight of the project during the construction phase. In this case, the CM is not directly “at risk” for project performance; rather, they are acting as the agent of the client. Going one step further, Construction Manager as Advisor, also known as CM Advisor or Construction Advisor, is when the client employs the CM to provide advice and counsel throughout the design and construction phases. In this case, the client contracts with another General Contractor to perform the project.
- Design-Builder, also known as Design-Build or Design-Bid-Build or Engineer-Procure-Construct or EPC, implies a role where the client contracts with one party to be both designer and General Contractor (or Construction Manager) of the project. The GC or CM may self-perform portions of the design or subcontract with architectural and engineering firms for design services.
Emerging Contract Formats
Integrated Project Delivery, or IPD or Multi-Party Agreement, is a wonderful emerging contract format. Under IPD, the parties under contract expand from just client and contractor. IPD parties include client, designer(s), Construction Manager, and in some cases, major specialty contractors (e.g., site work, mechanical, electrical). Under one contract, these stakeholders share risk and fees for successful achievement of the client’s project goals.
Clear as mud? Don’t worry. Nabholz has the flexibility and experience in most every type contract format or construction delivery methods described. We stand ready to help you navigate this maze to find the best solution for your unique needs.