CMPROMGT

Engr. Michael V. Almeida, CE, PMCE, MsCM

Assistant Professor
 The Angelite Prayer
Almighty God, we glorify you for giving us the Angelite
Charism. We thank you for the gift of Your Son, Jesus
Christ, who is the Way, Truth and Life. We bless you for
the continuous guidance of the Holy Spirit. Grant us,
we pray, courage and strength that we may give
perpetual praise to you in whatever we do. We ask this
through Christ, our Lord. Amen. Oh, Holy Guardian
Angels, guide us and protect us! Laus Deo semper!
CMPROMGT: Construction Methods & Project Management

LECTURE -2
Construction Contracts and
Specifications
 Intended Learning Outcomes
• Importance of process for Design and
Construction
• Practices in Selecting Contractors
• Contract Pricing Formats
• Different Methods of Project Delivery
• Key Decisions for Project Delivery
 Learning Assessments
• Recitations
• Assignments
• Quizzes
Considerations in selecting contract types:
• What is being purchase (a product or service)
• The completeness of the statement of work
• The level of effort and expertise of the Owner can devote to managing the
Contractor
• Whether the Owner wants to offer the Contractor an incentives
• The Marketplace or economy
• Industry standards for the types of contract used
 Contract Definitions

A. From a Legal Point of View

• A mutual agreement between two or

more parties that something shall be
done, an agreement enforceable at
law.
 Contract Definitions

B. According to FIDIC (International

federation of Consulting Engineers) :

• Contract means the General Conditions,

the Supplementary Conditions, the
Specifications, the Drawings, the Bill of
quantities, the Tender, the Letter of
Acceptance, the Contract Agreement.
 Contract Definitions

 C. According to Method of Payment :

• The agreement of how the owner will

pay the contractor for work
• performed such as a lump-sum or
cost-plus payment.
 Why Use contract in construction?
• Describe scope of work
• Establish time frame
• Establish cost and payment provision
• Set fourth obligations and relationship
• Minimize disputes
• Improve economic return of investment
Major Contract Types (traditional)
 TYPES OF CONSTRUCTION
CONTRACTS
1. Price Given in Advance Contracts
(Price-based Contracts)
a) Lump Sum Contract
b) Measurement or Unit Price Contract
c) Schedule of rates term contract
2. Cost Reimbursement Contracts
(Cost-based Contracts)
a) Cost + percentage
b) Cost + fixed fee
c) Cost + fixed fee + profit-sharing clause
 Factors Influencing the Choice of the Type of
Contract

• The appropriateness for providing an adequate incentive for efficient

• performance by the contractor
• The ability to introduce changes
• The allocation of risks
• The start and completion date of the project
Contract Types
• Traditional vs. alternative
• Classification by method of award and
method of pricing
• Model contracts have been developed by
PCA, PICE, SPAC, COFILCO, PCCI CPMAP,
UAP, CREBA, PICA and CONSTRUCTION
INDUSTRY AUTHORITY OF THE PHILIPPINES
(CIAP)
Contract Types
 Method of Award
1. Competitive bidding
– formally advertised public work
– selective invitation for private work
– awarding of contracts by:
• Lowest responsible bid or
• Best value i.e.: technical score  price or
price + time(ft), and other variations
Contract Types
 Method of Award
2. Negotiated contracts
– Generally private work
– Benefits include flexibility of pricing arrangement
– Often used on projects of large size and great complexity
– Owner may value expertise and integrity of a particular
contractor and can award contract without competition
that may otherwise exclude that contractor from the work
 Method of Pricing
 Fixed-price
1. Lump sum
– Traditional, single fixed price
– Predetermined price that includes profit,
overhead, and all other costs
– Greatest risk to contractor resulting in a higher
markup (the greater the risk, the higher
required rate of return )
– Most common contract form
 Lump Sum Contract( Advantages)
• The final price is known, by the owner, before the work
commences i.e. Cost known at outset.
• The contractor has more incentive to reduce his cost to
increase the profit.
• The contractor hopes to complete the job as quickly as
possible, to minimize overhead, to maximize profit and to
move to the next Job.
• Contractor selection is easy.
• Level of risks is low and quantifiable, and can be accurately
and completely described at the time of bidding such as
residential and building construction.
• More suitable when the client does not wish to be involved
in the management of the project.
• Suitable when limited variation is needed.
 Lump Sum Contract (Disadvantages)
• Changes in drawings and specifications can be very
expensive and source of trouble. In other words the
contract has limited flexibility for design changes.
• Contractor is free to use the lowest cost of material
equipment, methods.
• The contractor carries much of the risks. The tendered
price may include high risk contingency.
• Competent contractors may decide not to bid to avoid
a high-risk lump sum contract.
• Lump sum contracts might be less appropriate where
speed is important, or where the nature of the works is
not well defined.
 Method of Pricing
 Fixed-price
2. Unit-price contract
– Prices of specified units of work are fixed or
predetermined
– Actual cost to the owner will vary with actual
quantities placed
– Best used when details and general character of
the work are known, but quantities are subject to
variation
– Risk of unbalanced bids
 Unit Price contract
• Require sufficient design definition to estimate
quantities of units
• Contractors bid based on units of works
• Time & cost risk (shared)
• Owner : at risk for total quantities
• Contractor : at risk for fixed unit price.

• Large quantities changes (>15-25%) can lead

to increase or decrease of unit price.
 Unit Price ( Advantages)
• Easy for contract selection.
• Early start is possible.
• Saves the heavy cost of preparing many bills of
quantities by the contractors.
• Fair basis for competition.
• In comparing with lump-sum contract, changes
in contract documents can be made easily by
the owner.
• Lower risk for contractor.
 Unit Price (Disadvantages)
• Final cost not known from the beginning (BOQ only is estimated)
• Staff needed to measure the finished quantities and report on the
units not completed.
• Unit price sometime tend to draw unbalanced bid. (ForUnit-Price
Contracts, a balanced bid is one in which each bid is priced to carry its
share of the cost of the work and also its share of the contractor’s profit.
Contractors raise prices on certain items and make corresponding
reductions of the prices on other items ,without changing the total amount
of the bid)
 Schedule of rates contract
• A Schedule of the work items without quantities
is prepared by the owner and /or A/E to be
rated by the contractor.
• The descriptions of items and the units of
measurement are similar to those used in a
normal B.O.Q., but no quantities are given.
• It is common for separate rates to be quoted
for labor, plant, and materials.
• Used for repair and maintenance works or
under conditions of urgency.
 Schedule of Rates Contract
Advantages:

1. Work can be commenced earlier than if a full B.O.Q

has been prepared.

Disadvantage :

1. No indication of the final price of the works.

2. Very difficult to determine which contractor
submitted the most
advantageous offer.
3. May cause financial problems to the public owners
 Method of Pricing
 Cost-plus
• Contractor agrees to perform the work for a fixed or
variable fee covering profit and home office costs
(general overhead)
• Field costs are reimbursable at actual cost
• Used when:
– nature of the work or physical conditions are
unpredictable
– scope is unknown or difficult to define
 Method of Pricing
 Cost-plus
• All cost-plus contracts depend on cooperation among
A/E, owner, and contractor
• Record keeping and timely evaluation are extremely
critical
• Detail record of labor hours and salaries, material
and equipment must be maintained
• Good application for professional CM services
 Cost Plus
1. Actual cost plus a negotiated reimbursement to cover
overheads and profit.
2. Different methods of reimbursement :
–Cost + percentage
–Cost + fixed fee
–Cost + fixed fee + profit-sharing clause.
3. Higher risk to owner
4. Compromise : guaranteed maximum price (GMP)
reduces risk to owner while maintain advantage of cost
plus contract.
5. By using this type of contract the contractor can start work
without a clearly defined project scope, since all costs will be
reimbursed and a profit guaranteed.
 Cost + Percent of Cost
• 1. The contractor is reimbursed for all his
costs with a fixed %age of costs to cover
his services.

• 2. Project/site overheads may be covered

by the %age or computed as one of the
costs.
 Cost + Percent of Cost
Advantages Disadvantages

profitable for No incentive

the contractor to finish job
–Fee = percentage of the total quickly
project cost (Cost = $500.000,
Owner does
Fee = 2%) not know total
price
Larger the
cost of the
job, the
higher the fee
the owner
pays
 Cost + Percent (Advantages)
1.Construction can start before design is
completed.

2.If the contractor is efficient in the utilization

of resources then the cost to the client
should represent a fair price for the work
undertaken.
 Cost + Percent (Disadvantages )

1.The project total cost is completely

unknown before the project start.
2.No incentive for the contractor to be
efficient in his use of labors, materials or
equipments.
3. Minimum efficiency maximizes the profit.
 Cost Plus Fixed Fee
– Most common form of negotiated contracts
– COST = expenses incurred by the contractor
for the construction of the facility
• Includes: Labor, equipment, materials, and
administrative costs
– FEE = compensation for expertise
• Includes: profit
 Cost + Fixed Fee
Advantages Disadvantages
• Fee = percentage of the
original estimated total Fee amount is Expensive
figure fixed regardless materials and
– Utilized on large multi- of price construction
fluctuation techniques may
year jobs
be used to
– Ex: WW treatment expedite
plant Facility (Cost = construction
$20 million, Fee = 1%)
– $20 Million 1% fee = Provides
$200,000 incentive to
complete
the project
quickly
 Cost + Fixed Fee +
Profit-Sharing Clause
– Rewards contractors Advantages Disadvantages
who minimize cost
– Percentage of cost under
Provides Contractor must
GMP is considered profit
incentive to absorb any
and shared with the the amount over the
contractor contractor to GMP
• Guaranteed Maximum save money
Price (GMP)
• % of profit sharing is
Plans & specs. need
specified in contract
to detailed
 Cost + Fixed Fee +
Profit-Sharing Clause

• In this type of contract the contractor is

reimbursed at cost with an agreed-upon fee up
to the GMP, which is essentially a cap; beyond
this point the contractor is responsible for
covering any additional costs within the original
project scope
• An incentive clause, which specifies that the
contractor will receive additional profit for
bringing the project in under the GMP.
 Guaranteed Maximum
Price contract
• 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.
 Advantages
• Greater price certainty for clients as the contractor normally
includes a sum for future design development and for risks.
• GMP promotes pre-agreement of changes as its philosophy
links neatly with a contractual requirement to pre-agree the
cost and time implications of any potential changes.
• GMP provides greater control over spending as the
contractor is bound to a maximum price.
This alerts the team to any potentially expensive items of
design development.
• GMP aligns the contractor with client and consultants
encouraging team work with mutual trust and common goals.
• Less administration is required as changes are limited; there
is quick settlement of the final account.
 Disadvantages
• The client might pay too much as the contractor takes on
greater risk and thus includes in the price an allowance for
design development and risk. Often a competitive price is
sacrificed in lieu of appointing a contractor early.
• Contractor’s with design and build experience may have
useful knowledge.
• There is no standard form of contract for GMP so there is a
greater possibility of errors and misunderstandings of
liabilities between the parties that may result in conflict.
• Scope changes tend to cost more, it is accepted that scope
changes to design and build are more likely to be more
expensive than with a traditional contract, the same can also
be said for GMP contracts.
Other types of Construction
Contracts
 Design and Build contracts

• Unlike a traditional contract, a design and build

contract is one where the contractor undertakes
both design work as well as the work of
construction for the contract
• This is advantageous for employers who get a
complete design, full scope of works and
stipulated price from the outset
 Turnkey contracts
• A variant of the design and build contract is the turnkey contract
• In a turnkey contract, the contractor does not only carry out
design and construct obligations
• The contractor is also responsible for:
• ➢financing
• ➢approvals
• ➢procurement
• ➢fitting out
• ➢intellectual property issues (eg transfer of technology)
• In a turnkey contract, employers lose control over the process
in exchange of allocating a single point of responsibility on the
contractor
 Management contracts
❖It is also becoming increasingly common for
parties to enter into management contracts
instead of building contracts
❖In a management contract, the contracted
manager’s role is to ensure the implementation of
the contract is carried out effectively
❖The contracted manager gets involved early in
the process, as opposed to the building
contractor who is engaged later when the project
is ready to be constructed
❖It may well be that the “manager” is a related
company of the “contractor” eventually
 Build-Operate-Transfer (BOT)
contracts
❖A BOT contract usually happens for public
infrastructure works
❖In a BOT contract, the private company builds,
and operates a concession on the infrastructure
built for an agreed period of time before
transferring the infrastructure to the Government
❖Ideally, a BOT contract would be a good
mechanism for the private sector to fund
infrastructure projects
❖However, the reality may result in an overly
generous concession for the private companies
involved
 Supply contracts
❖There are parties in the construction industry
who are involved in supplying materials only, and
do not participate in any actual construction
❖For such contracts, the liability of the contractor
is limited to supplying materials that meet the
specifications
❖It is important when dealing with supply contracts
that proper tests are carried out before accepting
the materials supplied
❖Once the materials supplied are used, it would
be rare for these contractors to be held liable any
longer as there would be legal hurdles to point to
the inadequacy of their materials
 Term contract

• For maintenance, term contracts would be a common

practice, whereby a contractor is required to maintain a
certain facility for a pre- agreed term at a pre-agreed price
Construction Contracts
• Prequalification of bidders
– Evidence of satisfactory previous experience
– Financial stability
– Advanced or specialized prequalification may be
required as dictated by the magnitude and nature of
the work
– Bid bonds are often required
Elements of a legal contract
• offer
• acceptance
• consideration
• legal in every respect
• requires a meeting of the minds
• offer + acceptance = binding obligation
• Advertisement for bids
• Information for bidders
• Bid form
• General notices
• Notice of award
• Notice to proceed
• Bid bond
• Performance bond
• Payment bond
• Contract form or
agreement
• General conditions or
provisions
• Supplemental and/or
special conditions
• Plans
• Specifications
Characteristics of a “good” contract document:
1. Carefully considered
2. Expressed clearly
3. Time-tested
4. Comprehensive
5. Fair
6. Balanced
7. Applicable to the elements of a construction projects
Construction Contracts
……bidders are required to:
– examine all portions of the contract documents
– examine the physical conditions of the site
– determine legal requirements affecting the work
– complete these investigations prior to bidding
Construction Contracts
……contract documents should:
– Include a hierarchy to determine which
documents govern in case of conflict
– Not contain ambiguous language
– Not contain exculpatory clauses
 Construction Contracts -- General Conditions
• Contractor’s warranties
• Defective drawings
• Approval of contractor’s plans
and equipment
• Approval of shop drawings
other submittals
• Guarantee by the Contractor
• Conduct of the work
• Defective work
• Relations with other
contractors and
subcontractors
• Inspection of materials
• Inspection of field work
• Authority of the Eng’r.
• Duties of the inspector
• Permits and licenses
• Labor considerations
• Work done by the owner
• Lines and grades
• Order and discipline
• Performance
• Final inspection & acceptance
 Construction Contracts -- General Conditions
• Private and local government • Retainage
regulations • Bonding and insurance
• Employment rules
• Guarantee of equipment
• Emergencies
• Borings
• Minimum wage rate
• Domestic vs. foreign materials • Spare parts
and labor
• Construction reports
• Payrolls and bills of material
• Cooperation among contractors
• Patents
 Risk Allocations -- General Conditions
• Force majeure
• Indemnification
• Liens
• Labor laws
• Differing site conditions
• Delays and extension of time
• Liquidated damages
• Consequential damage
• Occupational safety, and
health of workers
• Permits, licenses, and
regulations
• Termination for default by
contractor
• Suspension of work
• Warranties and guarantees
Specifications
• Standard, supplemental, and special
provisions
• two types of specifications:
– method specification dictates equipment and
procedures
– performance spec specifies only the desired
end result or product
– should include hierarchy
Hierarchy
Governing ranking of contract components in case
of a discrepancy
• General Notices
• Special Provisions
• Plans
• Supplemental Specifications
• Standard Construction Details
• Standard Specifications
Classification Coding System
• Architectural building and site development
industry employees the CSI Format that includes
16 divisions of work.
• Public owners generally use a system of sections
or divisions developed and employed for several
decades
Codes, Standards, and Regulations
Model Codes
• National Building Code (PD 1096)
• National Structural Code
• Standard Building Code
• Uniform Building Code
• National Electric Code
• Plumbing Code
• Sanitation Code
• Fire Code
• Waste Management Act
• Mechanical Code
• Code of Ethics
• Safety Regulations (D.O.#13)
Codes, Standards, and Regulations
Model Codes
• Model codes are adopted in whole or in part by the local
municipality, and become enforceable under the law
Zoning Regulations
• imposed by local zoning commissions
Environmental Regulations
• imposed by National, or local agency
Codes, Standards, and Regulations
Standards
• ASTM
• Underwriters Laboratories, Inc. (UL)
• AASHTO
• ACI
• AISC
• many, many others
• no enforcement by these agencies
• specifications generally refer back to these
standards
Submittals required in the contract
– copies of subcontracts
– shop drawings and support calculations
– catalog cuts
– material or equipment samples
– schedule(s)
– certified payrolls
– certificates of insurance
– environmental test reports
– material test reports & certifications
Shop Drawings
– structural steel details & erection plan
– erection procedures (safety)
– PS/PC concrete items
– shoring & underpinning details
– jacking plans and calculations
– scaffolding and falsework
– concrete formwork design and details
– construction sequencing diagrams
Shop Drawings
– cofferdam design & details
– dewatering procedure
– stream diversions
– pipe and ductwork fabrication details
– reinforcing steel bending diagrams and bar lists
– structural timber elements
– ornamental iron or steel
– maintenance of traffic plans (alternates)
Payments and related issues
– mobilization and initial costs
– retainage
– progress payments and partial payments
– material payments
– change orders
– substantial completion
– punchlist
– final acceptance and payment
Changes in plans and specs
– clarification, correction, modifications prior to bid
are referred to as “addenda”
• owner must maintain a system of distributing and
acknowledging receipt of addendum
– plan and spec changes after award are referred to as
“revisions”, and generally require issuance of a
change order(s)
Change Orders
– a written order issued by the owner to the
contractor for a change to the contract within the
scope of work
– change orders are written for:
• extra work
• increasing or decreasing the contract quantities
• alterations
– change orders state the basis and amount of
payment and time extensions
Contracts
• Liquidated damages
• Incentive/Disincentive (bonus/penalty)
• Acceleration
– Increase crew levels, crew size
– Add shifts and/or extend work hours
• CPM schedule is an extremely valuable tool in
analyzing delay claims
Claims and Disputes
• a claim is a request by a contractor for additional
compensation or time extension for occurrences
beyond the contractor’s control including:
– differing or unexpected site conditions
– change in scope
– delays caused by the owner
• owner has duty to provide adequate, accurate data to
the bidders
Dispute Resolution
• Early settlement between parties
• Alternative depute resolution (ADR)
– negotiation – arbitration (1 or 3 members)
– mediation – neutral advisors
– Dispute Review Board (DRB)
• 3 or more odd number of board members selected evenly by
both sides
• Litigation
– sometimes unavoidable; usually undesirable; but
sometimes best method
Credits
• Credits – reimbursement from contractor to
owner for work eliminated (lump sum contract
or item)
• Credit may also be given when specified
performance criteria is not met
Claims Avoidance
• producing comprehensive, accurate, contract documents
• constructibility review
• clear understanding of contract requirements prior to
bidding
• having good administrative procedures in place
• open and honest communication
• timely troubleshooting
Claims Avoidance
• Claims avoidance begins in the pre-
construction phase

• Contract documents need to be clear,

accurate, comprehensive, and fairly distribute
risk
Ability to influence cost over time
• Greatest potential to influence cost is during the pre-
construction design phase
• Claims avoidance begins during pre-construction
• Design phase
– Intensive preparation and review of contract
documents
– Careful consideration of methods and equipment =
consider overall constructibility
 100%
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











Level of Influence on Cost

0%

Concept & Design and

Procurement and Construction Startup Oper.
Feasibility Engineering

Ability to Influence Construction Costs over Time

Design Professionals should:
• Specify locally available material
• Allow substitution of equal quality material
• Avoid one-of–a-kind or non-standard items where
possibly
• Design structures with as many redundant
elements as possible
• Design should allow construction using the
prevailing methods and equipment
Design Professionals should:
• Design to minimize required labor
• Specify a quality of workmanship consistent with the
quality of the project
• Do not require the contractor to assume responsibility
for information that should be furnished by the design
engineer/architect
• Produce simple, straight-forward specs = clearly state
what is expected
Project Delivery Organization
• Construction by owners forces
• Owner-managed construction
• Construction by general contractor
• Design-build team
• CM Contract
 Construction employing owner forces
– Usually small in-house construction or
renovations
– Industrial projects or institutional (such as
hospitals or schools
 Owner-managed construction
– Residential/commercial building developers
– Industrial or institutional
 Construction by General Contractor
– Also referred to as “Prime Contractor”
– Most common method of delivery
– Contractor bears substantial risks and financial responsibility
– Facility designed by in-house architect/engineer or by design
consultants
– Often requires specialty subcontractors
Specialty contractors might include those specializing in
one of the following:
• Excavation • Clearing and grubbing
• Steel erection • Blasting/demolition
• Concrete • Electrical
– Cast-in-place • Painting
– Prestressed/Precast • HVAC
• Masonry • Environmental
• Timber/wood framing remediation
• Piping/plumbing • Many, many others
 Design-Build (Turnkey)
– Single firm or team responsible for design and construction
minimizes coordination problems
– More efficient designs with the interjection of
constructibility and innovation
– Often employs fast-track construction
– Benefits include reduced overall delivery time and “one-stop
shopping” for the owner
– Disadvantages include complexity of evaluating proposals
 CM Contract -- Fee (management services
only) also referred to as “Agency”
– Specialized construction skills through all project stages
including preconstruction
– Provides close coordination between design and construction
– Eliminates impact of conflicts of interest
– Independent and objective evaluation of costs, schedules,
and performance
– Potential saving in time and cost
– Disadvantages include no risks associated with costs increase
 CM Contract – “At-Risk”
– CM assumes financial risks similar to a GC
– CM manages all phases of the work without performing
any actual work tasks
– CM’s only resources are management personnel
– Contractors/subcontractors have a direct contract with CM
– Contract form is often a negotiated guaranteed maximum
price arrangement
– Disadvantages includes lack of impartiality
Method or System of Project Delivery
• Traditional design-bid-build
• Phased or Fast-track
• Design-build
Design Phase Bid Construction phase

Traditional Design-Bid-Build

Design Phase Time

Savings

Construction phase

Phased or Fast-Track Construction