CV-457

CV-457
Contract Management
Contract Management

CV-457
CONTRACT MANAGEMENT
Lecture-4– (Week-4)

Engr. Rafia Nawaz

Lecturer Department of Civil Engineering
GIK Institute
Dr.-Ing Abdur Rehman Nasir
Assistant Professor ofEngineering
of Construction Engineering Sciences & Technology, Topi, Swabi KPK
and Management
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12.09.2019 NIT (SCEE), NUST H-12, Islamabad
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Topics to cover
Non-Traditional Methods of Project Delivery
❖ Managed methods
➢ Construction Management
➢ Project Management (Managing Contracts Approach)

Book reference :
FUNDAMENTALS OF BUILDING CONTRACT MANAGEMENT- Thomas E. Uher & Philip Davenport

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Managed Methods:
Construction Management or PCM
Approach

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Managed Methods: Construction Management

▪ Construction management (CM) is a popular example of ‘managed’ delivery
methods, characterized by a more active role for the client as a member of the
project team.

▪ It attempts to unite a three-party team of client, design consultant, and

construction manager into a cohesive contractual relationship, all with a common
goal to serve the project’s objectives and the client’s needs in the best possible
way.

▪ The construction team members ideally work together from the inception to the
completion of the project. The project lifecycle stages are treated as integrated
tasks within a construction system.
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Managed Methods: Construction Management

▪ The interaction of construction cost, quality, and completion schedules is the prime task of
the project team in order to give maximum value to the client in the most economical time
frame. Fast-tracking is also an integral feature of CM.

▪ Generally, CM methods of project delivery are grouped into ‘Agency CM’ and ‘Non-agency
CM’ depending on the role performed by the construction manager.

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Agency CM Method

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Agency CM Method
▪ In ‘agency construction management’ the construction manager operates as the client’s
agent in managing construction. The construction manager’s main tasks are to manage the
construction stage and coordinate the activities of subcontractors or separate contractors.
The construction manager has no contract to build.

▪ The client selects a design consultant to design a project, and a construction manager to
manage construction. A construction manager can be a contractor or design consultant.
The key requirement in appointing a construction manager is the knowledge and
experience of managing construction.

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Organization Structure of an Agency CM Method

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Organization Structure of an Agency CM Method

▪ An organization structure of the agency CM method shows the three main team
members, namely the principal/client, design consultant, and construction
manager, and a series of contract and communication links between various
team members.
▪ It is worth noting that separate contractors (the trade contractors) are
contracted directly to the principal/client, with the construction manager being
responsible for the coordination and administration of those contracts.

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Agency CM Method
The contract between the principal and the Construction
manager

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Agency CM – Contract b/w Client and Construction Manager

▪ The Client commonly engages a construction manager as early as possible in the

life of the project, either towards the end of the conceptual stage or at the
beginning of the design stage.

▪ The principal is willing to accept more risk, including that related to the execution
of separate construction contracts. In doing so, the principal expects that effective
teamwork within the project team will offset the principal’s higher exposure to
risk.

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Agency CM – Contract b/w Client and Construction Manager

▪ Under an agency CM contract, the construction manager’s risk is relatively low

since the construction manager has no direct contracts with separate (trade)
contractors.

▪ The first task of the construction manager is to coordinate with the design
consultant in verifying the accuracy of the brief, after which the construction
manager will formulate work packages that the design consultant will design and
document.

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Agency CM – Contract b/w Client and Construction Manager

▪ The construction manager will assist the design consultant by providing input on
technical matters and feedback on design buildability and cost.

▪ The construction manager will then administer a tender system through which
separate (trade) contractors will be selected and engaged, usually on lump-sum
contracts.

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Agency CM – Contract b/w Client and Construction Manager

▪ In the construction stage, the construction manager will administer separate
contracts on behalf of the principal and generally plan, coordinate and control the
construction activities of separate contractors.

▪ The construction manager’s primary responsibility is to co-ordinate and manage

activities of separate contractors to ensure adherence to the contract
documentation, the construction program, the cost budget and the quality
standards.

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Agency CM – Contract b/w Client and Construction Manager

▪ The construction manager’s reward is a usually lump-sum management fee, but it

may also be, wholly or in part, a percentage of the total construction cost.
▪ The fee will cover the construction manager’s costs, for example, the construction
manager’s profit, head office overheads, salary, and associated costs, and
recruitment costs for the site or head office staff, and legal costs.

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Non-Agency CM Method

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Non-Agency CM Method

▪ The most significant difference between non-agency CM and agency CM methods is in

the role performed by the construction manager in relation to construction.
▪ Until the start of the construction stage, the construction manager undertakes much
the same tasks under a non-agency arrangement as under an agency arrangement.
▪ However, under the non-agency arrangement, the construction manager’s role changes
in the construction stage to that of a contractor.

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Non-Agency CM Method

▪ A non-agency CM method is attractive to the principal when the risk of construction is

high.

▪ The principal wants to retain the benefits of teamwork between himself, the design
consultant, and the construction manager but requires the construction manager to
take full responsibility for construction by entering into direct contracts with
subcontractors.

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Non-Agency CM Method

▪ While fast-tracking is an important feature of both the agency CM and non-agency CM

method of project delivery, in a non-agency arrangement the design and construction
will not be divided into trade packages (separate contracts with the principal) as they
were in an agency CM arrangement.

▪ Instead, subcontracts will be let on a competitive basis with the construction manager
assuming the role of a sole contractor.

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Organization Structure of Non-Agency CM Method

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Organization Structure of Non-Agency CM Method

▪ Organization structure shows a typical structure of a non-agency CM project delivery
method with two main differences immediately apparent:

– the principal has no direct contracts with subcontractors

– subcontractors are now contracted to the construction manager.

▪ The principal’s intention of using the construction manager as a contractor while

maintaining the construction manager’s involvement on a project team is clearly
apparent.

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Non-Agency CM Method
The contract between the principal and the Construction
manager

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Non-agency CM – Contract b/w Client and Construction manager

▪ The principal may engage the construction manager either by tender or by negotiation.
▪ The appointment will be made early in the project’s lifecycle.
▪ Using competitive tendering, the construction manager may then progressively select
subcontractors as the design documentation becomes available and will enter into
subcontract agreements. In the construction stage, the main role of the construction
manager will be to construct the facility through the work of subcontractors.

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Non-agency CM – Contract b/w Client and Construction manager

▪ The most common option for a contract price in a non-agency CM contract between the
principal and the construction manager is cost-plus, with a payment of a fee to the
construction manager.

▪ The construction manager may also be paid the ‘agreed labor rates for the work performed
directly by the construction manager.

▪ The construction manager will be paid for all incurred ‘cost’ items including payments
made to subcontractors and suppliers, and for the cost of preliminary items.

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Non-agency CM – Contract b/w Client and Construction manager

▪ In cost-plus contracts, the final construction contract price is known
only after the project has been constructed.

▪ The principal largely relies on the skill and integrity of the construction
manager to maintain budget integrity.

▪ The construction manager’s contract may also contain liquidated damages for late
completion, bonuses for early completion, or a savings incentive clause.

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Summary
▪ For clarity, important issues shown graphically in various organization charts are briefly
summarized as below:
i. It is worth noting that Non-Agency CM differs from Agency CM only in that separate
contractors are replaced with subcontractors, who are now contracted directly to the
construction manager (represented by a solid line linking the subcontractors to the
construction manager). There is no direct contract between the principal and the
subcontractors (no solid line linking the principal and the subcontractors).

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Summary

ii. Non Agency CM organization structure clearly shows that the principal cannot sue the
subcontractors for breach of contract and that the construction manager is
contractually liable for the work of the subcontractors.

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Summary

iii. Non Agency CM organization structure also shows that if the

construction manager were to fail to pay the subcontractors, the
subcontractors could not sue the principal for the subcontract price.

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Summary

iv. Non-Agency CM organization structure is identical to traditional project

delivery method except for one broken line (a line of communication)
between the principal and the construction manager.

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Summary

v. This reflects the fact that the design consultant no longer has the traditional role of
managing the construction contract for the principal. The construction contractor
(now called a construction manager) manages as well as constructs. The contractual
relationship between the construction manager and the principal in the non-agency
CM method is exactly the same as under the traditional method of delivery.

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Summary

vi. In the traditional method, the design consultant has two functions, too (i) design and
(ii) manage, and the construction contractor has one function, to construct. In Non-
agency CM, the design consultant has only one function, to design, while the
construction manager has two functions, to (i) manage and (ii) construct.

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Project Management Method- (Managing

Contracts Approach)

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Project Management
▪ The project management delivery method is a unique organizational structure with the
project manager as the leader of the team.

▪ In order to successfully deliver the project, the project manager will apply the concept of
project management throughout its lifecycle.

▪ The project management (PM) delivery method is a more refined form of the agency CM
method with the addition of a project manager who assumes total responsibility for
managing the project from inception to completion.

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Project Management
▪ The principal appoints and empowers the project manager to represent his interests as
the leader of a project team and to bring a business-like approach into the coordination
and management of a diverse range of skills and organizations in producing a facility.

▪ Since the project manager assumes responsibility for the entire project lifecycle, it
follows that the client will need to appoint the project manager early in the life of the
project, usually at the start of the conceptual stage.

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Project Management
▪ The project team, led by the project manager, comprises the design consultant,
construction manager, and other relevant consultants. The principal is also a member of
the project team but is fully represented by the project manager in day-to-day decision-
making.

▪ Apart from being an effective team leader and motivator, the project manager is
responsible for the development of a strategic plan, organization of the necessary
resources both human and physical, coordination and integration of activities at each
stage of the project’s lifecycle, and control of the entire process.

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Organization Structure of the Project Management Delivery Method

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Organization Structure of the Project Management Delivery Method

▪ The origin of the organization structure of the PM delivery lies in an agency CM

method when the principal performed the role of a project manager.

▪ The project manager has no contracts with any other team member.

▪ While the principal empowers the project manager to lead the team and be the main
day-to-day decision-maker, the principal assumes the responsibility for contracts with
the other team members.

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Project Management Method

Contract between Client and PM

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PM Method – Contract between Client and PM

▪ The project manager is the principal’s agent and is required to act in the principal’s best
interest.

▪ The principal will engage the project manager in the early part of the conceptual stage to
assist in defining the project scope, feasibility, strategic planning, and briefing.

▪ The project manager will make recommendations to the principal on the selection of the
design consultant and the construction manager.

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PM Method – Contract between Client and PM

▪ From the beginning of the design stage, the project manager will work closely with the
design consultant and the construction manager on developing the design, agreeing on
work packages, coordinating and integrating the production of documentation,
arranging for competitive tendering, awarding contracts to separate contractors and
managing construction activities.

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PM Method – Contract between Client and PM

▪ The PM contract, due to its fast-tracking nature, is also cost plus and the principal may
insist on a guaranteed maximum price.

▪ The project manager may be required to pay a separate contractor, but the money would
come from a bank account set up by the project manager with the principal’s funds.

▪ The project manager will be paid a management fee in the form of a lump sum or a
percentage of the final construction cost and will be reimbursed for any out-of-pocket
expenses and approved expenditures.

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PM Method – Advantages and Disadvantages

▪ The PM option of project delivery promises to deliver the most complex projects in a
highly efficient manner.

▪ Because its success is totally dependent on the project manager’s ability to lead,
manage and motivate the interdisciplinary organizations that form the project team,
the selection of a proficient project manager is one of the most important decisions of
the principal.

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PM Method – Advantages
▪ The PM method provides a more professional approach to the
overall management of the project.

▪ The principal may replace the project manager without adversely

affecting any of the existing contracts.

▪ The principal is in total control over the rate of expenditure on the project.

▪ PM method can deliver a very high-quality project.

▪ Project management is an ideal approach to handle fast-tracking, for projects that are
complex in nature and where the risks are high.
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PM Method – Disadvantages

▪ The project manager may not have enough experience to deal

effectively with industrial relations issues.

▪ The project manager needs to be appointed in the early part

of the conceptual stage. This may not always be possible or convenient.

▪ The principal is exposed to a high level of contractual risk.

▪ The project manager must be given control over resources

including a fund for paying separate contractors.

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Factors to be Considered in Selecting a Procurement Approach

• Client's requirements on:

• Time
• Strict/flexible
• fast delivery
• Cost
• Budget
• Strict/flexible
• Cost certainty
• Quality
• Running cost and durability
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Factors to be Considered in Selecting a Procurement Approach

• Client’s characteristics:
• Knowledge and experience
• Resources

• Project’s characteristics
• Complexity
• Size
• Location

• Project risks and client’s attitude to the

risks
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Quiz :1
Friday, 7 October 2022
Wk-1 to Wk-3
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Example Problem:

An experienced business client intends to construct a building to accommodate the research

and development activities of his organization in Islamabad. The moderately complex nature
of the project requires sophisticated features to be incorporated into the design and
construction of the intended building. The client is highly concerned about the overrun of
costs and the price is required to be known as nearly as possible, at the outset. The quality of
the buildings is also very important to the Client. The client is also flexible on time and is
focused more on high quality and cost certainty.

Which project delivery method would you suggest to the client? Justify your answer by evaluating the
merits & demerits of each contractual method.

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Thank You!

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