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Construction Contracts and Delivery Methods

| Construction Contracts | Construction Delivery Methods | Construction Management |

There are several types of construction contracts and methods of construction delivery that are used to build schools in New Hampshire. Generally, standard contract documents developed by the American Institute of Architects (AIA) are used. There are other organizations such as the Associated General Contractors (AGC) who also publish contract documents, but the AIA documents are the most common.

In addition to the contract document itself, there will normally be a set of construction drawings and technical specifications that describe the work to be done and the materials to be used. The drawings should follow standard architectural and engineering practices for symbols and labeling and should include keys to symbols where appropriate. The specifications will normally follow the Master Format of 16 Divisions developed by the Construction Specifications Institute. A new Master Format with 49 Divisions was developed in 2004. A slow transition to the new format is expected in the next few years.

The most commonly used types of contracts and methods of construction delivery are discussed here. There are others that are used less frequently. There are also many variations and combinations that can be used. Contracts are most often written by the architect using a standard document. The school district should have an attorney review all contracts and make modifications as necessary to protect the interests of the district.

School boards and building committees will often spend many hours debating the type of contract and method of delivery to be used. All of the various agreements discussed in this chapter can result in a successful project if used correctly and in the right situations. Likewise, problems and dissatisfaction can occur with any contract. These agreements are first and foremost human endeavors. The skills and qualifications of the designers and builders and the relationships between the designers, builders, and owners, are far more important than what may be written on a contract document.

Teamwork and trust are more important than a piece of paper. In considering past projects or work done in other districts, the board must take care that good or bad results are not incorrectly attributed to the type of contract or method of delivery that was used. Quality firms will do quality work when the owner is willing to pay a fair and reasonable price.

Construction Contracts

In any construction contract, the cost of the project consists of the costs for labor and materials and the builder's profit and overhead. Before a project begins, the costs are only estimates. That includes price quotes from a contractor. There is risk involved for both the owner and the builder concerning the builder's ability to perform the work for a given actual cost. The differences between types of contracts primarily lie in who takes the risk, who has to pay for cost over runs, and who keeps the savings if the project costs less than the estimate. In a major construction project, some or all of the different types of contracts may be used. There may be one type of contract between the owner and the primary contractor and different types of contracts between the primary contractor and the sub-contractors.

Lump Sum. A lump sum, sometimes called stipulated sum, contract is the most basic form of agreement between a supplier of services and a customer. The supplier agrees to provide specified services for a specific price. The receiver agrees to pay the price upon completion of the work or according to a negotiated payment schedule. In developing a lump sum bid, the builder will estimate the costs of labor and materials and add to it a standard amount for overhead and the desired amount of profit.

Most builders will estimate profit and overhead to total about 12-16 percent of the project cost. This amount may be increased based on the builder's assessment of risk. If the actual costs of labor and materials are higher than the builder's estimate, the profit will be reduced. If the actual costs are lower, the builder gets more profit. Either way, the cost to the owner is the same. In practice, however, costs that exceed the estimates may lead to disputes over the scope of work or attempts to substitute less expensive materials for those specified.

  • Unit Price. In a unit price contract, the work to be performed is broken into various parts, usually by construction trade, and a fixed price is established for each unit of work. For example, painting is typically done on a square foot basis. Unit price contracts are seldom used for an entire major construction project, but they are frequently used for agreements with subcontractors. They are also often used for maintenance and repair work. In a unit price contract, like a lump sum contract, the contractor is paid the agreed upon price, regardless of the actual cost to do the work.
  • Guaranteed Maximum Price. In a guaranteed maximum price (GMP) contract, the contractor estimates the cost just like in a lump sum bid, but profit is limited to a specified amount. In the event that actual costs are lower than the estimates, the owner keeps the savings. In the event costs are higher, the contractor pays the difference and profit is reduced.

Sometime, savings are shared between the owner and the contractor as an incentive to keep costs down. As in a lump sum contract, higher than anticipated costs can lead to disputes. The GMP will only apply to the work specified in the cost estimate. Changes, possibly including unforeseen circumstances or additional work which the contractor agrees to perform can result in a final payment that is higher than the GMP. School districts should take care that their voters understand that increases are possible.

  • Cost Plus. In a cost plus contract the contractor's profit is set at a fixed amount. If actual costs are lower than the estimate, the owner keeps the savings. If actual costs are higher than the estimate, the owner must pay the additional amount. Cost plus contracts are rarely used for school projects because school administrators and school boards rarely have the authority to exceed the amount appropriated for the project. The great advantage of a cost plus contract is that, generally speaking, the project will result in the building that was envisioned, even if costs run high. The builder is less likely to cut corners or argue for less expensive materials because his profit is not in jeopardy. By the same token, the builder has little incentive to keep the owner's costs down.

Construction Delivery Methods

Construction delivery refers to the relationships between the owner, the builder, and the designer. There are three primary methods used to construct schools in NH. Each has advantages and disadvantages and should be used only in situations where its advantages can be beneficial.

  • Design-Bid-Build - The traditional method of building a school is to have the work designed by a team of architects and engineers and then advertise the plan to solicit bids from construction firms. The winning firm becomes the General Contractor, responsible for overall completion of the project using the firm's own employees, subcontractors, or a combination of both. The design and construction phases of the project are clear and distinct. A complete set of design documents is finished before the builder becomes involved.

There are several advantages to this process. First of all it has been around for a long time and is well understood. The design documents must be thorough and complete which lessens the chance of misunderstandings. This method should allow plenty of time to consider alternatives and to complete a thorough integrated design that involves all the occupants and design team members. The disadvantages are that this method takes the greatest amount of time to complete and that the designers and builders can sometimes become antagonists when the builder is unable to understand or even unable to build what has been designed.

Design-Bid-Build is most frequently done using a lump sum bid contract, but guaranteed maximum price is sometimes used. One pitfall to look for is that sometimes builders will intentionally bid low in order to win the project and then hope to make up the loss in profits through change orders.

  • Design-Build - Is very old method that fell out of use until recent years. In this process the owner selects one contractor to both design and build the project. In New Hampshire this typically means that the owner selects a builder who then hires the design team as required. Design-Build is primarily intended to save time. Because the designers and builders work together from the beginning, the design effort can be substantially reduced. It is not necessary to prepare drawings in great detail if the builder already understands what needs to be done.

Time is saved by using a fast track schedule where the builder begins working on each phase of the construction as soon as the design for that phase is complete. Ideally the designers complete the next phase just as the builder is ready to start that phase. Design-Build works very well when using standard designs that have been built repeatedly. It is absolutely critical that the owner and builder have the same clear picture of the final project before construction begins. There are those who advocate Design-Build as a cutting edge method and as a method which will result in significant cost savings. Neither is correct. Design-build had been around since the construction of the pyramids.

There may be some slight savings in design costs, but those have no impact on the costs of labor and materials for the actual construction, which is where the greatest part of the total cost is to be found. Since the owner and the builder commit to a cost before design is started, there is an amount of uncertainty which will have an associated cost that will probably be included in the builder's bid. The Department of Education feels strongly that Design-Build is not a good method for most school projects for the following reasons

  • Fast track schedules eliminate the possibility of integrated design. They also often mean that very little time is spent with the occupants to ascertain their needs in a new facility.
  • When the designers work for the builder, rather than the owner, the checks and balances that exist in other methods are lost. Many New Hampshire communities lack a robust code enforcement department. The architect and clerk of the works are usually relied upon to keep track of construction to ensure that the builder follows the plan and codes. The architect cannot objectively fill this important role if he works for the builder.
  • People in a hurry make mistakes. Fast track schedules can lead to serious problems which are difficult and expensive to resolve.
  • Saving time is the main advantage of design-build, but that should not be as critical an issue for a school project as cost and construction quality.
  • Changes are difficult to implement once construction starts in a Design-Build project because everything moves too fast and the budget is often inflexible. When a costly unforeseen situation arises, the only alternative is often a reduction in the scope of work. This will lead to a final product that is something less than what was envisioned at the beginning of construction.
  • Unforeseen circumstances are the bane of any construction project, but they are particularly difficult to handle in Design-Build. For this reason Design-Build is ill suited for renovation projects.
  • Design-Builders like the freedom that this method gives them. They do not have to clear every decision with the design team. If the owner also has limited involvement, the builder can get about his business and get the job done without interruptions. This can be an advantage when everything works well, but when problems arise, as they almost always do in construction, unilateral decision making by the builder can lead to everyone's dissatisfaction with the outcome.

Construction Management

Is a relatively new method of delivery in which the owner hires a construction professional early in the design phase. The construction manager works with the design team to help ensure that the design is something that can in fact be built for a reasonable cost and that the builders will be able to understand the design drawings and specifications. This can result in a reduction of the total design effort similar to what occurs in Design-Build. There are two basic types of construction management: construction manager as advisor and construction manager at risk. In the construction manager as advisor variation, the construction manager acts as technical consultant to the owner and has no legal responsibility for the performance of the actual construction work.

The construction manager as advisor method is seldom used on school projects in New Hampshire. In the construction manager at risk variation, which is frequently used for school projects, the construction manager becomes the prime contractor during the construction phase. The construction manager awards subcontracts much like a general contractor in a Design-Bid-Build project. Construction management projects are most frequently done through a guaranteed maximum price contract, but other types may be used. Fast track schedules are also possible, with all their inherent risks that are described under Design-Build above.

The great advantage of construction management is its emphasis on teamwork, and the fact that a builder is involved in the design and decision making process almost from the start. Another advantage is that the owner can often be more involved in the selection of sub-contractors if so desired. The disadvantages of construction management are that the builder must be paid for his participation in design, that there may be some blurring of the lines of responsibility, and that the owner should expect to have more meetings requiring attendance. Another problem with construction management is that there are relatively few true construction managers currently working in New Hampshire.

Many construction firms advertise that they will do any of the three types of construction delivery discussed in this manual, but most of them are general contractors at heart. The basic difference between a construction manager and a general contractor is in their approach to managing subcontractors and in keeping the owner's costs down. A true construction manager, whose fee is not affected by the result, will attempt to negotiate the best value for the owner in selecting subcontractors. A general contractor will tend to negotiate in a way that maximizes his profit.

Many contractors who call themselves construction managers will expect to self perform significant portions of the project. That means that they will use their own firm's employees, rather than subcontractors, to do much of the actual construction work. This arrangement may not result in the best value to the owner. A good rule of thumb is that if the firm owns anything larger than a pickup truck they are not construction managers and a traditional Design-Bid-Build contract is a better choice for that firm.

In summary, there are several choices that the school district must make concerning the type of contract and method of delivery to be used. In making these choices the school board should consider and attempt to maximize the advantages of the various contracts to best meet the goals of the district. The board should also consider the ability of the district staff to manage the contract. No one contract, method, or combination is better than another for all situations. They all work if used properly.

New Hampshire Department of Education
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Telephone: (603) 271-3494 | TDD Access: Relay NH 711