Essentials of Building Construction Contracts
| Publication year | 1984 |
| Pages | 1 |
| Citation | Vol. 13 No. 1 Pg. 1 |
1984, January, Pg. 1. Essentials of Building Construction Contracts
When attorneys are asked to review or draft a building construction contract, they will be confronted with voluminous documents. They will save time and be more effective if they recognize the important components and their location. This article intends to help attorneys identify the type of contract, the collection of documents that forms the contract and the important aspects of bidding, administration and performance. The information presented is also applicable to many other types of construction contracts.
Usually, attorneys are ivolved in the review or drafting of one of the following contract types.
The fixed price, also known as the "lump sum" contract is most common. It is most often used where the owner has a fully developed set of plans and specifications for small and mediumsized projects. The contractor agrees to construct the project for a fixed price. Although the contract can be negotiated, usually the owner invites bids based on a set of bidding documents which include the plans and specifications. The owner then awards the job on the basis of the bids after considering price and such other factors as financial strength and experience. The contractor agrees to provide only that which is explicitly stated or necessarily implied by the drawings and specifications.
The contractor's profit is determined by the difference between its costs and the lump sum price. Typically, the contractor's bid will include a "contingency" amount so as to protect itself from the unknowns in the cost of the project. This contingency reflects the contractor's assessment of the uncertainties in the project, due to such things as project complexity, short bid preparation time, severe climate or unusual operating procedures. Under the fixed price contract, as well as all other types of construction contracts, the price is usually subject to adjustment for the contractor's additional costs for specified performance problems, such as delays and revisions to the drawings and specifications.
Another common type of contract is the cost of the work plus a fee, with a guaranteed maximum price. This arrangement is often the result of negotiation between the contractor and the owner, rather than of the bidding. The owner reimburses the contractor for costs of the work as defined in the contract. The exact cost of the project is not fixed by the contract. However, the contractor does provide a guaranteed maximum price (cost), also known as an "upset price," which sets a limit on the owner's outlay for costs and the contractor's fee. The contractor can recover only the stated maximum regardless of actual cost. Its profit is the fee earned based on a percentage of the cost of the work or, in some instances, a lump sum fee. Usually, the contractor reaps a percentage of the savings if the costs are below the guaranteed maximum price.
Unlike the arms-length relationship under a fixed price contract, the contractor typically obligates itself to a "relationship of trust and confidence" with the owner. The owner selects a contractor from a group invited to compete on the basis of its qualifications, fee and plan of performance for the project, including its proposed schedule, sequence of work and staff. Under the guaranteed maximum price contract, the owner often begins construction with incomplete drawings and specifications, a process known as "fast-tracking." Under the fixed price contract, the contractor is expected to anticipate reasonably and to allow in its price for work and materials not shown on the incomplete drawings. The owner also expects the contractor to participate in "value engineering" to suggest cost effective design changes.
It may be impractical for the contractor to agree to an upset price if the project is one of great magnitude, contains too many unknowns or if the work to be done ("scope of the work") is too ill-defined to allow establishment of a guaranteed maximum price. Such a project will be undertaken on a cost of work plus fee basis without a guaranteed maximum price. In all other respects, a cost plus contract is like a guaranteed maximum contract.
A unit price contract is used frequently for completing tenant spaces in an office building. The building owner offers the tenant certain "building standard" finishes such as partitions and carpeting which the tenant finish contractor has offered to provide at fixed prices per unit (such as lineal feet or
square feet) for a specified period of time. The contract usually specifies a percentage for the contractor's fee and overhead based upon the cost of the work performed. Finishes which are not of the building standard type will be accomplished on a lump sum or cost plus basis, with or without guaranteed maximum cost, depending on the project.
In "design/build" contracts, the contractor instead of the owner furnishes the design. The contractor may do this with in-house designers, but most often it retains an outside professional architect or engineer. The design/build contract is usually a guaranteed maximum cost type of contract, but can be a lump sum or cost plus contract.
"Construction management" is a term used for a variety of relationships. In the pure form, the construction manager provides a professional management service to the owner. The owner enters numerous separate contracts with so-called "trade contractors," which are the equivalent of subcontractors in the general contracting relationship. The construction manager performs no physical construction work but administers the various trade contracts. At the other extreme, the construction manager provides management services and also enters into the trade contracts. This approach is more akin to general contracting. A project may have a mixture of relationships, somewhere between the two extremes.
All of the contract types typically comprise the following components, which are collectively known as the "contract documents":
1) Owner-contractor agreement (one of the types discussed above)
2) General conditions
3) Supplementary general conditions
4) Specifications
5) Drawings
Documents known as "invitation for bids" and "instructions to bidders," often used to state important obligations of the owner and bidders during bidding and prior to award of the contract, are usually excluded from the contract documents. These bidding documents are discussed below.
Attorneys should focus their review on the owner-contractor agreement and the general and supplementary conditions. They should review the specifications only to the extent the agreement contains "general provisions" or other divisions with similarly broad titles. Such provisions may alter the terms of the agreement or the general or supplementary conditions. The attorney's clients should be responsible for reviewing the rest of the specifications and the drawings.
According to industry standards, the owner-contractor agreement should contain:
[T]he basic information as to contract price or sum, the basic terms applicable to paying this amount and retainage arrangements, any terms as to guaranteed maximum or sharing of cost savings or incentive compensation, provisions for liquidated damages, identification of the key parties involved in the Project, identification of the various documents that are attached which comprise the Contract Documents....(fn1)
The American Institute of Architects ("AIA") publishes the single most widely used document for private construction---AIA Document A201, "The General Conditions of the Contract for Construction," 1976 ed. ("A201"). The commentary to A201, Document D-3, describes the general conditions as:
...standardized contractual provisions describing the rights, responsibilities and relations of the owner and the contractor under the construction contract, as well as the related duties and responsibilities of the architect.(fn2)
The general conditions prescribe essential provisions for dispute resolution, allocation of risk, completion, bases for withholding payments, changes in the work, concealed conditions encountered during the work, warranties and termination of the contract. Of more concern to the client than the lawyer, A201 states the procedures for submittal of shop drawings, the timing of payments, the responsibilities of the architect, safety precautions and insurance requirements. It has the advantage of being frequently interpreted by the courts, and these decisions are compiled in a case citator.(fn3)
A201 is tailored for fixed price contracts. A comprehensive drafting of new general conditions or a totally revised A201 is usually not justified for normal, small and medium projects because of the time and expense. A201 should be modified for use with cost plus and design/build contracts. The AIA does publish a document entitled A201/CM, which revises A201 for construction management. The Associated General Contractors publishes collections of documents for both construction management and design/build contracts.
"Supplementary conditions" are used to supplement and modify the general conditions. This is an extremely important area for attorney review. Most often, clients will not ask counsel to reinvent the general conditions, but to advise them as...
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