PSMSC 101-PSMCM 01 103 CONTRACT MANAGEMENT and ARBITRATION

MODULE No. 1 – Contract Management Overview

Overview
The desired outcome of this module is to equip all contract management professionals
with the basic knowledge and understanding to manage contracts and ensure
compliance to the statements and scope of work for contractor performance. These
professionals will understand the roles and responsibilities of a contract manager, the
contract management cycle, and obtain the basic skills to handle situation that require
contract changes or modifications due to contract disagreements. It is also important to
be familiar with the roles and responsibilities of other purchasing, procurement, and
contracting staff you collaborate with to accomplish your task.

The module will also define contract management as well as discuss the key
components and qualities of contract management. It will be important to understand
the applicable laws and policies that provide the framework to conduct contract
management in the specific location of the project, the different types of contract and
pricing methodologies, and to apply critical thinking and flexibility in order to uphold the
current way of conducting good business practices in project’s location.

Learning Objectives
By the end of this lesson, you should be able to:

 Define your roles and responsibilities as a contract manager;

 Practice the basics of contract management and monitoring;
 Demonstrate an understanding of how the procurement and planning process
relates to contract management;
 Recognize the different types of contracts and payment/pricing methodologies.

Definition of Contract Management

 A process that involves the systematic and efficient management of: Contract
Development; Contract Execution; and Contract Monitoring.

Contract Development – the procurement phase including evaluation and contractor

selection

Page 1 of 23
 Contract Execution – those activities leading up to the final execution of the contract,
including negotiation and approval of the final statement of work.

Contract Monitoring – those activities used to track and monitor the contract from the
date of execution to contract expiration

These are the general process steps for managing a contract. These steps are
broken down into greater detail throughout the lifecycle of contract management.
This process will be discussed in more details throughout this course.

 The monitoring and control of contractor performance to ensure optimal outcomes

from a contract. It includes establishing communication pathways and protocols,
monitoring progress toward delivery of contract deliverables, managing payments,
controlling variations, measuring contractor performance, and closing out the
contract.
 The process of awarding a contract and ensuring that the contractor’s performance
meets contractual requirements specifically in the area of inspection and progress
reviews; authorization of progress payments; work authorization management and
approval; dispute resolution; and the recommendation of control modifications and
approval of the contractor’s actions to ensure compliance with the contractual terms
during contract execution. Since a contract is a legal document, it is imperative that
the project team be acutely aware of the legal implications of actions taken when
managing or administering a contract.
 A multi-stage process that goes on through the entire duration of the contract and
ensures that the parties meet their contractual obligations in order to deliver the
specific objectives provided in the contract. The main purpose off contract
management is to make sure that the objectives of the contract (supply of goods,
delivery of services or execution of works) are met in a timely fashion and value for
money is achieved. In practice this means optimizing the efficiency of the processes,
balancing costs and risks against returns and ideally aiming for a continuous
improvement in the performance over the life of the contract.

Good contract management may:

 Increase Efficiency
- Prepare, from the onset, a contract management plan and mobilize the relevant
resources for it.
- Support ongoing monitoring of a contractor’s performance.

Page 2 of 23
 - Operate a robust contract administration system, and maintain a reliable record
management system.
 Reduce Risk
- Anticipate what could go wrong e.g. payment delays, right of access to the site
- Put in place mitigation measures to address any identified risks.
- Manage the closure of the project, ensuring that no pending issues or obligations
remain unaddressed.
 Deliver Value for Money
- Contractor meets the requirements of the project.
- Projects are completed on time or earlier.
- Applicable legislation is complied with.

Key Components of Contract Management

 Tracking Delivery of Goods and Services – throughout the performance of the

contract.
 Tracking Vendor Responsibilities – are they doing what they are responsible for in
accordance with the contract
 Tracking Budget and Approving Payments – making sure you are within your budget
and not overspending
 Validating Conformance to Requirements – this will be examined in the next Module,
but should align with validating the scope of works or functional/business
requirements for the contract
 Monitoring Performance and Metrics – this requires upfront planning to establish the
metrics for reporting. The initial monitoring plan should be developed early in the
contract and development phase and be based on early risk assessment. Because
risk is dynamic, the monitoring plan can change throughout the contract term. Work
with subject matter experts, stakeholders, and your contractor to determine what
these are.
 Managing Vendor Relationship
These are the key components involved with contract management, this list is not
complete as more goes into contract management.
As you can see from the list, the contract manager’s primary role is to manage and
mitigate risk. Contract management is one of the highest audit risk areas of
procurement. You can have a perfectly written contract, but without proper
management, there is every probability the project will fail.

Page 3 of 23
Qualities of Good Contract Management

 Be Proactive – by actively managing the monitoring your contract, you can address
issues before they potentially become a problem
 Be Collaborative – work collaboratively with your contractor as well as other
members of your team and stakeholders
 Be Focused on Risk – watch for increases and decreases in risk throughout the
contract term – measure and mitigate
 Be Communicative – with all members of your team, management, stakeholders and
most importantly, with your contractors

In ecology, the word sustainability characterizes the ability of biological systems to

remain healthy, diverse, and productive over time. Long-lived and healthy wetlands and
forests are examples of sustainable biological systems.

Contract & Project Management

What is the role of project management principles throughout the lifecycle of the
contract?

In most companies, Contract Management and Project Management are viewed as

different functions.

Contract Management can benefit from the application of processes, methods,

knowledge, skills, and experience commonly used by project managers. A contract
manager is responsible for monitoring the quality, timeliness, completeness of works,
continual movement toward the objectives of the contract, and managing and mitigating
risk.

Many of the principles and activities that project managers perform to plan, implement,
and control projects effectively can be used to effectively manage contracts.

For example, some project manager activities may include setting up systems and
processes to track and report progress and budgets, maintaining clear and
comprehensive documentation, and working to identify and resolve risks before they
become issues.

While project management principles can help contract managers as they focus on
developing, executing, and monitoring a contract and project delivery, there are some
exceptions.
Page 4 of 23
Not all contracts involve “projects”, for example, ongoing contracts for supplies or simple
services.

As the contract manager, you should use applicable project management principles
throughout the contract management lifecycle, wherever applicable.

Employee VS. Contractor – Contract Management is not the same as Employee

Management

As the contract manager, you don’t supervise the vendor. For example you would not
tell a vendor when to take lunch, or when to leave or take a break. While a contract
may use issued supplies such as an office desk or phone, these things are specific to
the contractor’s agreement with a company. It is important to understand your role as
contract manager as well as the role of the contractor.

These are some factors to consider when determining an employee vs. contractor
relationship:

 Behavioral Control – Does the business have the right to direct and control how the
worker does the task for which they were hired. The following are examples of
instructions about how to complete the work:

- When and where to do the work

- What tools or equipment to use
- What workers to hire or assist in the work
- Where to purchase supplies and services
- What work must be performed by a specified individual
- What order to sequence to follow

The key consideration is whether the business has retained the right to control the
details of a worker’s performance or has given up that right

 Treatment of the contractor is of the upmost importance

- If a company retains the right to direct or control the Contractor, then that person is
an Employee, NOT a Contractor

Page 5 of 23
 - In many cases Contractors are required to work on site. They are provided
workspace, sometimes a computer, and a telephone. These business decisions
are based on the needs of a company
- However, as long as the Contractor does the work based on his or her expertise,
the company does not tell them how or when to do the works (other than possible
limitation of core business hours), a contractor relationship exist.

Employee Management has very specific HR rules and applicable laws, including
payment of employer taxes and providing medical and other benefits. By treating our
contractors as employees we run the risk of BIR penalties and paying other benefits to
the contractors, sometimes being forced to put them on payroll, especially after a long
working relationship.

Contract Management and Monitoring

What is the role of contract monitoring in the lifecycle of the contract?

Contract monitoring is only one aspect of Contract Management, and is comprised of a

variety of tools and activities that fall within the realm of contract management.

Monitoring a contract means any planned, ongoing or periodic activity that measure and
ensures contractor compliance with the terms and conditions of the contract. The level
of monitoring should be based on a risk assessment of the services provided and the
contractor’s ability to deliver those services. Every communication with a contractor is
an opportunity to monitor activity.

The purpose of monitoring is to ensure the contractor is:

1. Complying with the terms and conditions of the contract and applicable laws and
regulations;
2. Adhering to the project schedule and making appropriate progress toward the
expected results and outcomes;
3. Providing the quality of services expected:
4. Identifying and resolving potential problems and providing constructive, and
timely feedback.

Monitoring activities may include, but are not limited to, the following:

1. Periodic contractor reporting. Contractors submit progress or other appropriate

data and deliverables to report on services being provided, adherence to the

Page 6 of 23
 contracts, and degree of progress being made. Substandard performance can
also be determined.
2. On-site reviews and observations. Contract managers may conduct on-site
reviews, interview contractor staff to ascertain their understanding of program
goals, interview clients about services received (if appropriate), review key
systems and service documentation, review client case records, review
personnel records to ensure staff have appropriate credentials, review fiscal
record, and observe operations whenever possible. The results of these reviews
should be documented in writing and compared with contract requirements.
3. Invoice reviews are one of the most common monitoring activities. Contract
managers compare billings and invoices with contract terms to ensure the costs
being charged are accurate and consistent with the contract requirements, and
are within the compensation limits set by the contract. Verifying that fund are
tracked by fund source will help prevent over-payments.
4. Audit report reviews. Contract managers review any required audit reports and
audit work papers to ensure the contractor takes appropriate and timely
corrective action, if required.
5. Other periodic contact with the contractor. Meetings and other periodic contact
with the contractor to review progress facilitates continuous dialog and mitigates
problems.

Documentation of monitoring activities must be maintained by the company to verify that

monitoring has been conducted. Contract files should include, for example, copies of
letters and e-mails, meeting notes, and records of key phone conversations as evidence
that conscientious monitoring has occurred during the contract. This is especially
important where there are issues with the contractor’s performance.

The Basics of a Contract

A contract is an agreement, upon sufficient consideration, to do or not to do a particular

thing OR a covenant or agreement between two or more persons, with a lawful
consideration or cause.

A contract is:

1. A legally binding agreement

2. An exchange of legal consideration
3. Enforceable
4. May or may not be written
5. Creates an obligation for named parties to fulfill
Page 7 of 23
Basic Elements of a Contract

1. Identification of the Parties: Typically, the first paragraph of the contract

identifies who the contracting parties are.
2. Period of Performance: This includes the start date and end date of the contract.
The start date (or effective date, date of execution, or date of final signatures) is
the date the contractor can begin providing services and will get paid for those
services. The end date is the date on which the contractor will stop providing
services.
3. Statement of Work: This is the most important section of your contract because
it will describe for the contractor what services they will provide, your expectation
about how they will provide them, and identify outcomes, deliverable, timelines,
and tasks. This section may also describe the responsibilities of your company
relative to the contracted-for services.
4. Compensation: This section of the contract deals with contractor payment.

- Specifically identify the payment methodology(ies) describing how the

contractor will be paid, i.e. by deliverable measure or outcome, hourly rate, etc.
- Total maximum value of the contract (any money being paid to the contractor
under this contract – includes professional fees, other expenses, taxes, etc.
- Some contracts require that you identify how the contractor will be paid,
however you are not always required to include the total maximum value of the
contract
- Instructions on how the contractor may request payment, either by invoice or
some other documentation method. Instructions should include what
information the contractor should provide on the payment request.

5. Terms and Conditions: The contract contains many “terms and conditions” which
are the clauses that explain to both parties all the rights, obligations, and
protections in the contract. Contracts are often split into:

- Special Terms and Conditions, which explain all the information pertaining to
the particular service you are buying. This section of the contract will include
Period of Performance, Statement of Work, Compensation, Insurance and other
provisions.
- General Terms and Conditions, which are the clauses that apply to everyone
that your company contracts with. This section will include termination, dispute
resolution, compliance with non-discrimination laws and many other provisions.

Page 8 of 23
 6. Signed by Individuals with Signature Authority: The contract must be signed and
dated by people with authority to bind their company to the contract. This applies
to both the contractor and the company. So, make sure you don’t sign contracts
unless you have been authorized to do so.

Legal Elements of a Contract

 An offer;
 An acceptance (in strict compliance with the terms of the offer);
 Legal Purpose / Objective;
 Mutuality of Obligation (also known as “meeting of the minds”);
 Consideration; and
 Competent Parties

Different Types of Construction Contracts

Lump Sum or Fixed Price Contract

Under a Lump Sum or Fixed Price Contract, the contractor agrees to perform the work
specified and described in the contract for a fixed price. The price of a fixed contract
can only be changed upon the execution of a change order, under which the owner and
the contractor either (1) agree for the contractor to perform additional work that falls
outside the scope of the original work for an agreed upon extra compensation or (2)
agree to remove certain work from the original scope of work and reduce the price of
the contract in proportion to the work that the contractor no longer has to perform.
These types of contracts are appropriate when a clear scope and a defined schedule
have been reviewed and agreed upon.

The benefit of using Lump Sum or Fixed Price Contracts is that the owner’s
construction costs are more predictable. The owner’s cost will be capped by the
contract price, so long as no change orders are issued and no disputes arise on the
project.

There are not many drawbacks with the use of the Lump Sum or Fixed Price Contract.
To ensure that the Lump Sum or Fixed Price Contract fulfills this function, i.e., provides
a predictable and accurate cost of construction for the owner, it is very important for the
scope of work under the contract to be clearly defined. This will eliminate the owner’s
risk of the contractor attempting to increase the contract price through the issuance of
Page 9 of 23
change orders for the performance of additional work that is arguably not part of the
original scope of work but should be. Additionally, the schedule should clearly define
the work and the deadlines that must be met. This could perhaps be a drawback to the
use of the Lump Sum or Fixed Price Contract because it would require additional time
and money to clearly define the scope of work and create a detailed schedule (though
this is something that should be done on every construction project to protect the
owner).

In addition, other types of contracts, such as Cost-Plus Fee or Time and Materials
Contracts, could arguably be cheaper if the actual cost of construction were less than
the contractor’s estimated cost of construction on which the fixed price is based. But
these types of construction contracts could also be more expensive if the actual cost of
construction were to exceed the contractor’s estimated costs.

Therefore, the Lump Sum or Fixed Price Contract is a relatively safe and predictable
contract type that could be used on a construction project.

Cost Plus Contracts

The Cost-Plus Contract is a type of a construction contract under which the owner
agrees to pay the complete cost of the materials and labor needed to needed to
build the project along with a fee for the contractor’s overhead and profit. This
contract type is favored where the scope of work is highly uncertain or indeterminate
and the type of labor, material, and equipment needed to build the project is also
uncertain in nature.

This type of contract involves payment of the actual costs, purchases or other
expenses generated directly from the construction activity. Under this arrangement,
complete records of all time and materials spent by the contractor on the work must
be maintained. Cost Plus Contracts must contain specific information about certain
pre-negotiated amount (some percentage of the material and labor cost) covering
contractor’s overhead and profit. Costs must be detailed and should be classified as
direct or indirect costs.

There are multiple variations for Cost plus contracts, and the most common are:

Page 10 of 23
 1. Cost plus Fixed Percentage Contract – Compensation is based on a
percentage of the cost;
2. Cost plus Fixed Fee Contract – Compensation is based on a fixed sum
independent the final project cost. The owner agrees to reimburse the
contractor’s actual costs, regardless of amount, and in addition pay a
negotiated fee independent of the amount of the actual costs;
3. Cost plus Fixed Fee with Guaranteed Maximum Price Contract –
Compensation is based on a fixed sum of money. The total project cost will
not exceed an agreed upper limit;
4. Cost plus Fixed Fee with Bonus Contract – Compensation is based on a fixed
sum of money. A bonus is given if the project is finished below budget, ahead
of schedule, etc.;
5. Cost plus Fixed Fee with Guaranteed Maximum Price with Bonus Contract –
Compensation is based on a fixed sum of money. The total project cost will
not exceed an agreed upper limit and a bonus is given if the project is finished
below budget, ahead of schedule, etc.; and
6. Cost plus Fixed Fee with Arrangement for Sharing Any Cost Savings Contract
– Compensation is based on a fixed sum of money. Any cost savings are
shared with the buyer and the contractor.
The Cost-Plus Fixed Fee construction contract is more predictable than Cost Plus
Fixed Fee Percentage Construction Contract because the contractor’s fee for
overhead and profit is, as its name suggests, predetermined. Regardless of what the
cost of construction ultimately amounts to, the contractor’s fee remains the same.
Conversely, the Cost-Plus Fixed Percentage Construction Contract provides more
variability with respect to the amount of the contractor’s fee because it is directly
linked to the cost of construction, which in these types of arrangements is inherently
unpredictable. In fact, the Cost-Plus Fixed Percentage Construction Contract
arguably incentivizes the contractor to not keep the costs low because its fee
increases with the cost of construction.

The Cost Plus with Guaranteed Maximum Price Contract seeks to eliminate some of
the risks associated with Cost Plus Contracts in that it caps the owner’s overall
financial exposure. Thus, while the contract price is to be determined based on the
cost of construction and the contractor’s fee, owner’s costs are capped at a certain
amount.

Page 11 of 23
 These types of Cost-Plus Construction Contracts are oftentimes grouped with bonus
contracts, built-in contingencies, or cost savings contracts which incentivize the
contractor to complete the project with agreed targets regarding schedule, quality,
and budget in exchange for additional compensation on the project.

Unit Price Contracts

Unit Price Contracts are based on anticipated quantities of items which are counted
in the project in addition to their unit prices. The final price of the project depends
upon the quantities required to carry out the work. Generally, these types of
contracts are suitable only for construction and supplier projects which involve
accurate identification of different types of items, but not their numbers, in the
contract documents. These types of contracts are oftentimes used on excavation
projects.

Time and Material Contracts

Time and Material Contracts are usually preferred if the project scope is not clear, or
has not been defined. The owner and the contractor must establish an agreed hourly
or daily rate, including additional expenses that could arise in the construction
process. The costs must be classified as direct, indirect, mark-up, and overhead.
Sometimes the owner might want to establish a cap or specific project duration to the
contractor that must be met, in order to have the owner’s risk minimized.

Project Delivery System

All project delivery systems include three participants; owner, designer, and
construction organization, with others as well. Their relationships vary according to the
different systems and ownerships. This section describes several ways in which the
various parties involved in the construction contract can be related.

Traditional design–tender–build

We call this approach to construction project delivery ‘traditional’ because it has been
the approach of choice for owners of most construction projects. With this method, the
owner contracts with a design organization to perform preliminary planning, carry out
design work and prepare contract documents.

Page 12 of 23
Following the completion of this phase, a construction organization is selected, based
upon the owner’s criteria, and the owner enters into a contract with the successful
contractor for the assembly of the project elements in the field.

In this method, the contract for the design work is separate from that for the construction
work. Thus, the term design–tender–build implies a strict, and sometimes time‐
consuming, project schedule sequence – designing, followed by tendering, followed by
constructing. Future chapters describe these steps in detail.

Design–Build

The distinguishing characteristic of the design–build, or design–construct, method is

that the owner executes a single contract with an organization that becomes
responsible for both the design and the construction of the project.

The Design–Build Institute of America (1994) lists potential benefits from the design–
build method as follows:

Page 13 of 23
 Singular responsibility. There is a single point of responsibility, avoiding ‘buck
passing’ and ‘finger pointing’.
Quality. The greater responsibility implicit in this method provides motivation for
high quality and proper performance.
Cost savings. The single entity can work together as a team to evaluate
alternative methods and materials efficiently and accurately.
Time savings. Design and construction can be overlapped, and bidding time after
design is eliminated.
Potential for reduced administrative burden. After the contract is agreed upon,
the owner will have relatively little investment in coordinating and arbitrating
between designer and contractor, since they are a single entity.
Early knowledge of firm costs. The single design–construction entity is
responsible for both design and cost estimates.
Risk management. Cost, schedule and quality can be clearly defined and
appropriately balanced.
Balanced award criteria.

Construction manager

The owner may engage a construction manager to provide professional construction

management services. The construction manager organization provides advice to the
owner regarding construction matters, including cost, schedule, safety, the construction

Page 14 of 23
process and other considerations; such advice may be offered throughout the project
life cycle or at selected portions thereof.

Agency construction management

In the ‘agency’ type of construction management arrangement, the construction

manager acts as advisor to the owner for a fee and the owner engages separate
contractor and designer organizations. Here, the construction manager acts as an
extension of the owner’s staff and assumes little risk except for that involved in fulfilling
its advisory responsibilities.

At‐risk construction manager

Page 15 of 23
In contrast, the ‘at‐risk’ construction manager occupies a contractual position between
the owner and the execution contractors. The construction manager replaces the
general contractor in holding the various trade contracts. In addition to the general
contractor roles on the traditional design–tender–build approach, the at‐risk construction
manager provides expert advice to the owner on all matters related to the construction,
usually beginning well before the field work begins.

Page 16 of 23
Project manager

Sometimes the owner decides to turn the entire project over to an independent
manager. As one example, a school district may have little or no in‐house expertise on
capital project development; rather than employ a large temporary staff to oversee
planning, design and construction, they might use the ‘project manager’ approach.

This method adds a project manager between the owner and the architect/engineer and
general contractor in the traditional contract. Thus the project manager manages the
project on the owner’s behalf. This arrangement implies that the project manager
contracts with the designer and the general contractor.

Page 17 of 23
Document and construct

This is a variation of the design–build arrangement, wherein the owner engages a

design team to develop a project concept, overall schematic layouts, performance
specifications and other preliminary design details sufficient to select a contractor or
construction manager through a tender process.

After the contractor is selected, the design consultant’s contract with the owner is
transferred to the contractor through a process called novation. The contractor then
becomes responsible to the owner for completion of design, as well as construction,
with the understanding that the design work will be completed by the originally selected
design organization.

Advantages of this method include a greater control of planning and specification by the
owner, as well as the advantages listed for the design–build method. The design firm
bears the uncertainty of not knowing to whom they will eventually be contracted for
completion of the design.

Page 18 of 23
Separate prime contracts

It is an arrangement in which the owner contracts directly with individual specialty

contractors, each of whom can be considered as a ‘prime’ contractor, because there is
no single general contractor to coordinate their work.

In the provided particular example below, we include an ‘agency’ construction manager,

who will assist the owner in this coordination, but the chart makes it clear that the
construction manager is not related contractually to the several prime contractors.

Page 19 of 23
Turnkey

A turnkey contract is one in which the owner and contractor agree on a fixed contract
sum for a contract under which the contractor will take responsibility for the entire
project.

Such agreements are often designated as EPC contracts, because of the prime
responsibilities for engineering – providing basic and detailed design, procurement –
supplying parts and other goods required for the project and construction – erecting and
commissioning the project. The well‐known and much‐respected Federation
Internationale des Ingenieurs‐Conseils (FIDIC) designates such projects as EPC
turnkey projects (F´ed´eration Internationale des Ing´enieurs‐Conseils, 1999). In this
type of project, it is a construction organization that usually enters into the contract with
the owner (called the Employer by FIDIC and often the Principal in some countries).

At first glance, this form looks much like the design–build form discussed earlier.
However, the scope of the contractor’s responsibility is typically broader than basic
design, procurement and construction, as it includes such services as project financing
and land procurement and other tasks not generally within the design– build scope. The
owner provides a brief describing desired outcome, performance criteria and standards,
the parties agree on a fixed price and the contractor proceeds, with no participation by
the owner in the performance of the work.

Build–own–operate–transfer

The build–own–operate–transfer (BOOT) type of project has evolved as a means of

involving the private sector in the development of the public infrastructure. The concept,

Page 20 of 23
in use in some parts of the world for some centuries, requires the private sector to
finance, design, build, operate and manage the facility and then transfer the asset to the
government free of charge after a specified concession period.

The term BOT, for build–operate–transfer, was first coined by the Turkish Prime
Minister in 1984 in connection with the privatization of that country’s public‐ sector
projects. The terms BOOT and BOT are used synonymously, while terms like DBO
(design–build–operate) and BOO (build–own–operate) imply construction and operation
but no transfer.

Typical ‘concession periods’ range from about 10 years, not including project
development time, for some power station projects to as long as 55 years, including
approximately 7 years for construction, for the Eurotunnel project.
It is apparent that such an approach requires a complex organizational structure and
carries considerable long‐term risk for the project sponsor, while minimizing such risk
for the governmental owner.

In a typical BOOT project, the parties are likely to include the following:

Client – usually a governmental agency;

Constructor – responsible for both design and construction, although the general
design will usually be dictated by the client and may be carried out by the client;
Operation and maintenance contractor;
Off takers – entities that agree to purchase the outputs of the project, such as
water or electricity, usually a governmental agency;
Suppliers of materials, equipment and so on for both the construction and long‐
term operation of the facility;
Lenders and investors;
Sponsor – a consortium of interested groups, usually including the constructor,
operator and financial institution, that prepares the proposal and, if successful,
contracts with the client to carry out the design, financing, construction and
operation.

Joint venture

Page 21 of 23
Adding further complication to our consideration of project organizational relationships is
the joint venture. Such an arrangement is ‘a voluntary association of two or more parties
formed to conduct a single project with a limited duration’. Joint venture agreements are
formed between construction firms or between design firms and construction firms; they
do not include owners. In a sense they are special purpose partnerships, because of
their separate, temporary nature.

The usual purpose of such an arrangement is to spread the risks inherent in large
projects and to pool resources in a way that permits the joint venture to execute a
project that would be beyond the capabilities of one of the parties individually. Each
party is called a coventurer, or joint adventurer; they begin with an agreement between
themselves, whose purpose is to seek the contract for a project. If they are successful,
the joint venture itself contracts with the project owner, with one of the coventurers
stipulated as the sponsoring coventurer. The temporary combination of two or more
companies allows them to pool construction equipment, personnel, office facilities,
financial means and other resources. Each coventurer has an active role in performing
the work and shares in any profits or losses, in accordance with their agreement.
Force account

The so‐called force account approach to construction project organization is very simple
– the project owner acts as the prime contractor and carries out the work with its own
forces by providing field supervision, materials, equipment and labor.

This method is usually confined to relatively small, uncomplicated projects that are built
for the owner’s use rather than sold to another party upon completion. Examples might
include a highway department that uses its own forces to perform a culvert replacement
or a minor realignment and an educational institution that uses its own building services
crews to renovate classrooms. Such owners usually have their own guidelines for
deciding the project magnitude and complexity beyond which they choose to contract
with separate construction organizations.

They must consider the tradeoffs among the extra time and expense of the formal
contracting process and the possible construction cost savings, potential time savings
and improved quality resulting from these competitive or negotiated contracts. Often,
such small‐scale projects are also designed in house by the owner’s staff.

Phased construction
Page 22 of 23
Although more a scheduling approach than a delivery system, we discuss phased
construction, or ‘fast‐tracking’, here because several of the delivery systems are better
suited than others to this method of planning and carrying out the project schedule.

The basic idea is that some portions of the design work occur concurrently with field
construction, thus achieving an overall savings in total project duration. Recall the
traditional design–tender–build approach in which the entire project is fully designed
prior to the calling for tenders for the construction phase. Under this method,
construction does not begin until the end of the tendering and contractor selection
efforts, which necessarily must follow completion of design.

Contrast this approach with a scheme under which enough design work is completed to
begin field work. An example might be a building project that is designed and built in
several parts.

After the foundations are designed, foundation construction begins. Design for the
balance of the structure proceeds concurrently with that first construction effort. The
structural frame design is completed while foundation installation work is underway,
after which the structural frame is erected. The process continues, with design and
construction occurring in overlapped phases.

Page 23 of 23