Chapter 5

Construction Project Delivery and

Contracts
(Readings: Ch. 4)

Objectives:
• Students will be able to identify, distinguish, and compare the
various kinds of construction project delivery systems and
contract types.

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5.1 Contract Environment
• Multiple parties involved in construction project
• Construction activities are structured by contractual relationships.
– The owner and contractor(s)/ design professional
– The contractor and subcontractor(s)/ surety
– The (sub)contractor and workers/ equipment and material
suppliers
• Contract is an agreement between two or more parties to do
something. It is a promise or a set of promises for the breach of
which the law recognizes duty. A contract is legally enforceable.
• The roles of contract documents:
1. Who are the parties to a contract?
2. What are their promises?
3. Other aspects of the contractual agreement.
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5.2 Project Delivery Methods
• In ancient times, “master builders” act as a single point of contract.
• Master builders conducted design and construction simultaneously.
• Over the past 100 years, designing and building were gradually
separated
• Separation of activities led to a sequencing of activities.
• A design professional prepared the project plans, and a separate
firm was contracted to perform the actual construction of a facility.
• Over the past 30 years, a number of new concepts for project
delivery have been developed to compress the time required to
construct a facility.

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• Project delivery method: the comprehensive process of
assigning the contractual responsibilities for designing and
constructing a project.
• Project delivery addresses two critical issues:
1. Is the responsibility to the owner for project design and
construction tied to a single entity or multiple entities?
2. Is the criteria for award based on lowest cost or on other
criteria?
• Types of project delivery systems and contracts:
– Q1: (1) Design-Bid-Build (DBB) contract, (2) Design-Build (DB)
contract, (3) Construction Management (CM) contract.
– Q2: (1) competitively bid contract, (2) negotiated contract.

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5.2.1 Design-Bid-Build Contract
• The most commonly used project delivery system in nowadays
construction projects. Electrical engineer

Owner A/E Mechanical engineer

Landscape architect
General
Structural engineer
Contractor

…
Sub Sub Sub workers

Sub/sub workers Equipment

and Material
Equipment workers Suppliers
and Material ……
Suppliers
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Construction Project Development
– Owner’s Perspectives (Design-Bid-Build)

• A constructed facility is realized through a project format.

• Project development cycle:

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5.2.2 Design-Build Contract
• DB contract also referred to as “turn-key” contract.
• DB contractor can be referred to as a design builder, or an EPC
(Engineer, Procure and Construct) contractor.

Owner

Design Builder
Designer (A/E) Constructor

Sub Sub workers

…… …… ……

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• It is advantageous from the client’s point of view to have a single
contractor provide the entire project as a single contract package.
• Disputes between the design team and the construction force are
matters internal to a single company.
• Design and construction can be done concurrently.
• Coordination between design and construction is also enhanced:
low life cycle cost, efficient construction process, constructability/
maintainability.
• Used mainly on large and complex projects, and only for firms with
large design and construction capabilities.

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5.2.2.1 Design-Build in a Consortium Format
• In the past decade, the use of design-build contracts has become
more common in the building construction sector.
• Builders with no in-house design capability can form consortium.
• The owner contracts with the consortium to provide total project
package
• Each member of the consortium is at risk and is motivated to work
with other members to minimize delays and disputes.
• The consortium give the owner a final lump-sum price at the end of
the preliminary design phase (30 to 40% of the design).
• Reducing the need for contingency as final price is locked in.
• Consortium members are motivated to be innovative and avoid
disputes.
• Competition has been a major factor. Non-selected consortia incur
substantial losses. 9
5.2.3 Construction Management Contract
• Owner contracts separately, but somewhat simultaneously, with a
design consultant (A/E) and with a firm whose primary expertise is
construction (the Construction Manager).
• Construction Manager (CM) is hired during the design phase,
allowing it to work directly with A/E and avoid any potential design
issues before completion of construction documents.

• Two types of CM contract:

– Agency Construction Management Contract (CMa)
– Construction Management At-Risk Contract (CM at-risk)

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5.2.3.1 Agency Construction Management (CMa)

Owner

Designer
CM (A/E)

Suppliers/
Trade
Vendors
contractor 1
Trade
Subcontractor contractor N
Suppliers/
Vendors
Subcontractor Subcontractor

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5.2.3.1 Agency Construction Management (CMa)
• Construction manager acts as an agent of, and advisor to, owner.
• Owner has trade contracts with multiple trade contractors and
suppliers. Construction manager receives a fee for service basis,
and manages, supervises and coordinates the trade contracts on
behalf of the owner in the best interests of the owner.
• CM acts as a construction coordinator and assists in obtaining bids
and managing the construction.
• The construction management firm’s position links owner,
contractor, and architect/engineer.
• The agency construction manager provides a single point of
coordination to owners.
• Although the construction manager works on behalf of the owner in
managing and coordinating all aspects of the project, all contracts
between design and construction firms are signed by the owner.
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5.2.3.2 Construction Management At-Risk
• CMa is project coordinator working on behalf of owner, not
contractually liable for the successful completion of the work.
• Owner, lack of experience in dealing with construction problems
and protocols, may be put at risk by poor decisions made by the
CMa while supervising and controlling the project.
• CM at-Risk: construction manager not only coordinates project,
but also assumes responsibility for construction phase, like a
construction contractor in DBB.
• The CM at-Risk signs all contracts related to the construction
phase of the work, and take direct responsibility for construction
means and methods.
• The design and other pre-construction contracts and
responsibilities are signed by or remain with the owner.

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5.2.3.2 Construction Management At-Risk
• The construction manager is hired during design phase (prior to
the completion of the design phase) to act as a project coordinator
and general contractor. Sometimes called CM/GC.
• Or sometimes called Construction Management as Constructor
(CMc) contract.
Owner

CM Designer
(A/E)

Suppliers/
Trade Vendors
contractor 1
Trade
contractor N
Subcontractor
Suppliers/
Vendors

Subcontractor Subcontractor
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5.2.4 Summary of Project Delivery Systems
• For manufactured products:
– Product is available for inspection prior to purchase.
– We purchase it from a single individual or source.
• For construction projects:
– Facility is purchased before it is “manufactured”.
– The owner needs to coordinate many entities.
– No entity warrants the proper operation of the end item.
– Traditionally, it is seldom to purchase a finished unit from a
single source. Usually involving a designer and a contractor, in
a Design-Bid-Build format.

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• Owners generally like to work with a single source to purchase
facilities as-built. This is possible for single-family houses.
• Large construction projects are not first built and then presented to
the owner for purchase because of high risks.
• Project delivery systems for “one-stop shopping”:
– Design-Build contracts
– Construction Management contracts
• In the Design-Build contract, owner enters into contract with a
single entity, the Design Builder.
• In all forms of the Construction Management format, the owner
holds multiple contracts.

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• Fast tracking/ phased construction is allowed in DB contracts and
CM contracts.
• Fast track construction: stages of design and construction
overlap, thereby shortening the time needed to complete the project.

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Multiple Prime Contracting
• Sometimes, the owner divides a project into more than one part
and contracts directly with several contractors rather than with a
single prime contractor.
– E.g. separate contracts with major specialized trades like
electrical contractor, plumbing contractor, heating ventilating
and air conditioning (HVAC) contractor, and the contractor for
construction of the building itself.

Owner A/E
Vendors

Prime Prime Prime

Contractor Contractor Contractor

Sub Sub Sub Sub workers 18

 Pros Cons

Design-Bid- - Encourage competitive - Slow

Build bidding - Lack flexibility to changes
(DBB) - Transparent - Trade contractors may
blame each other
Design-Build
(DB)

Agency
Construction
Management
(CMa)
Construction
Management
At-risk
(CM-at-risk) 19
5.3 Major Types of Construction Contracts
• Competitively Bid Contract
– Most widely used format
– Yielding low and competitive price
– Two main categories: (1) lump sum and (2) unit price
• Negotiated Contract
– Often use a cost-plus payment method, i.e., contractor is
reimbursed for the cost of doing the work plus a fee
– Reduced risk to the contractor
– Flexible for owner to use other criteria other than price
– Not well suited to public projects

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5.3.1 Competitively Bid Contracts
• Project Advertisement – Request for Proposal (Notice to Bidders)
– To invite a quote for the work to be performed.
– Award is made to the lowest price and responsible bidder.
• Contractor qualifications are reviewed in price-ascending order.
Contractor qualifications considered include:
1. Technical competence and experience
2. Current financial position
3. Bonding capacity
4. Current amount of work under way
5. Past history of claims litigation
6. Defaults on previous contracts

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5.3.1 Competitively Bid Contracts (cont'd)
• Advantages
– Competition ensures lowest responsible price.
– Essential for public work to ensure all bidders are treated
equally.
• Disadvantages
– Change orders/modifications tend to offset competitive
advantage.
– Purposely low bid (zero or negative profit)
– Plans and specifications must be totally completed prior to bid
advertisement.
– Long project duration as parallel design and construction is not
possible.

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5.3.1.1 Lump-Sum Contracts
• A lump-sum contract quotes one price for all work and services
– Direct costs: labor, materials, machines
– Indirect costs: field/front office supervision, equipment
maintenance costs
– Profit: e.g., 10%, 15%
• Primarily used in building construction; not suitable for earth work

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5.3.1.1 Lump-Sum Contracts (cont'd)
• Advantages
– Guaranteed price for the work specified
– Owner without worrying about contingencies
– Reduced work of field measurement for contractor
• Disadvantages
– Lack flexibility to change design or modify contract
– Any deviation to original plan must be handled as change order.
– Potential litigation
– Adversary contractual relationships

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5.3.1.2 Unit-Price Contracts
• Payments are based on precise measurement of field quantities.
• Work is broken down into work items characterized by units.
• A guide quantity is often given for contractor to quote price.
• Larger quantities allow economies of scale.
• Allow some flexibility for variations in the amount of work.
• Allow price renegotiation if actual field quantity deviates
significantly from guide quantity.

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5.3.1.2 Unit-Price Contracts (cont'd)

Work Item Estimated Contract Bid Actual Final Costs

Quantities Unit Prices Amount Quantities
Trench 14,000 CM $40 $560,000 13,500 CM $540,000
Excavation
Fill 4,500 CM $180 $ 4,900 CM $
Materials
Backfill 9,500 CM $32 $ 9,500 CM $
Total $ $

• Risk to the owner under unit-price contracts is obvious. If the

owner’s quantities vary greatly from the actual requirements of the
job, owner will be responsible for additional costs.

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5.3.1.2 Unit-Price Contracts (cont'd)
• Advantages
– Flexibility in accommodating the variation in field quantities.
– For the owner, precision of quantity takeoff need not be as
exact as lump-sum contract.
– Reduce the number of change orders.
– Commonly used in heavy and highway construction contracts
where earthwork and foundation work predominate.
• Disadvantages
– Owner does not have a precise final price.
– Contingency allowances must be made.

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5.3.1.2 Unit-Price Contract: Unbalancing the Bid
• Project expenditure (expense) curve and income curve

• Income curve lags behind expenditure curve.

• Contractor borrow money to finance the difference.
• Overdraft is supported by the bank pending reimbursement from
the client.
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• To reduce overdraft financing,
– Move the income curve up / to the left as far as possible
• Unbalance the bid: inflate unit prices for items occur early in
construction while deflate price for “close out” items
• Unbalanced bid income profile:

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• Owners are sensitive to bidding unbalancing. Owner may ask
contractor to justify or even reject the bid.
• Some contracts obviate unbalanced bid by allowing the contractor
to quote a “mobilization” bid item. The mobilization item moves
income curve to the left of the expense curve.
• Owner assumes the overdraft financing at his rate, rather than
having the contractor charge for financing at the higher rate.
• Income profile with mobilization payment:

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5.3.2 Negotiated Contracts
• Contract price and payment method can be negotiated.
• Mainly pertains to contractor selection
• Flexibility: non price criteria, varying degree of design
completeness
• Based on available documentation, contractor presents
qualifications, required costs and fee to complete the job
• Cost projections depend on design completeness
• Contractor evaluation: experience, reputation, facilities, staff
availability, charge rates, fee structure
• Shortlisting and negotiation on contract details

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5.3.2 Negotiated Contracts (cont'd)
• Most common contract form: COST + FEE.
• Contractor is reimbursed for expenses incurred
• Fee: profit or markup in addition to cost reimbursement
• Various fee calculating formula, varying effect on contractor’s
profitability
• Periodic reimbursement for progress payments
• Must clearly define reimbursable items and accounting procedures
• Sensitive cost items: overhead costs, equipment, subcontracts

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• Four types of cost plus fee structure
– Cost + percent of cost
– Cost + fixed fee
– Cost + fixed fee + profit-sharing
– Cost + sliding fee
• Percent of cost: seldom used, lucrative for contractor, subject to
abuse, little efficiency incentive
• Fixed fee: Fixed amount of fee regardless of fluctuation of costs
• Fixed fee + profit-sharing: sharing underrun of target cost
• Sliding fee: bonus for underrun but penalty for overrun
Fee = R(2T-A)
T = target cost; R = base percent value; A = actual cost
• Plans, drawings and specifications must be sufficiently detailed to
allow determination of a reasonable target 34
Examples of Cost Plus Fee Structures
Fee Original cost = Actual cost = Actual cost = $90M
$100M $110M
Cost + 5% of cost

Cost + fixed fee of

$5M

Cost + fixed fee

($5M) + profit
sharing with ratio
(contractor:owner
= 30:70)
Cost + sliding fee
with R = 5%, target
cost = $100M
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• Guaranteed Maximum Price Contract
– Contractor is reimbursed for actual costs of materials, labor,
equipment, subcontracts, overhead, and profit up to a
maximum fixed price amount.
GMP Contract Actual Cost Contractor Impact Owner Impact
Amount Plus Fee

$20,000,000 $20,290,000 Suffers a $290,000 No impact, with unchanged

loss contract amount
$20,000,000 $19,900,000 Percent: Earns less Saves $100,000
Fixed: No impact
Sharing: Earns more

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• Negotiated contracts are most commonly used in the private
sector, where owner wants to exercise a selection criterion other
than low price alone.
• Cost-plus-fee contracts are used almost exclusively for complex
long-duration projects.
• Negotiated contract allows fast track construction in which design
and construction proceed simultaneously.
• Compression of design-build sequence: substantial saving of
financial costs: in a hotel building, site excavation and sub-
basements construction may be started while the roof-top
restaurant is still being designed.

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Summary
• Construction Project Delivery Methods and Contracts
– Separate entities for design and construction?
• Note the contractual relationships and coordination relationships
• DBB, DB, CM (CMa, CM-at-risk)
• CM-at-risk (CM/GC) vs. DBB? CM-at-risk vs. DB? CM-at-risk vs.
CMa? DBB vs. DB?
• Fast-track construction, phased construction
– Award of contract based on price only?
• Competitively bid contracts: Lump-sum, Unit-price
• Unit-price contracts: Income curve, Expenditure curve, Overdraft,
Unbalancing the bid, Mobilization payment
• Negotiated contracts:
– Cost-plus-fee contracts: Fee structure (% of cost, fixed fee,
fixed fee plus profit sharing, sliding fee), Guaranteed Maximum
Price
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References
• Halpin, D. W. (2006). Construction Management, 3rd edition, John Wiley &
Sons, Inc.
• Knutson, K., Schexnayder, C.J., Fiori, C.M., and Mayo, R. (2008).
Construction Management Fundamentals, 2nd edition, McGraw-Hill.
• Jackson, B.J. (2004). Construction Management Jump Start, Wiley
Publishing, Inc.

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