Code and Legal Topics
November 2005

Construction Relationships and their contracts

This article illustrates the organizational features and the advantages and disadvantages inherent in three different contract relationships between clients and their contractors.

A contract relationship develops as a result of the client’s prioritization of his interests which generally fall into three categories: Price, Quality and Time. The availability of the client’s resources and his willingness to commit them for the management of the process will significantly affect his selection of a delivery system.

The three examples that follow illustrate generally accepted construction contract relationships – each one faithful to client interests to one degree or another.

I. Traditional Lump Sum Competitive Bid

Conventional procurement wisdom holds that the best price advantage is realized by putting construction documents out to multiple firms for competitive bids. The Client must have the staff resources required to support oversight of the design and bidding process. This model is the one preferred by large corporations and all public (government) work.

Advantages:

• Maintains client’s quality standards.
• Obtains best initial price.

Disadvantages:

• Requires client to be involved in the design and bidding process.
• Project duration is longer in this ‘Design – Bid – Build’ process.
• Successful (low) bidder may be an unknown quantity.
• Cost savings available through ‘Value Engineering’ of component systems by those most qualified: the subcontractors, is not available during the initial design phase.
• Does not allow preliminary construction to take place under the contractor's supervision.

II. Negotiated Construction Management

Executed by means of a two-part contract this relationship allows a client to select the contractor and the design professional simultaneously (to work in tandem) and to take advantage of the contractor's expertise, organizational skills and the technical proficiency of his design/build subcontractors during the preconstruction (design) phase. The contractor usually submits a "not to exceed" sum prior to the start of the construction phase.

Advantages:

• Maintains client’s quality standards.
• Reduces project duration by accelerating the design process, virtually eliminating the 'bidding' process and allowing preliminary construction to take place under the contractor's supervision.
• Reduces resources commitment on the part of the client.
• Value engineering is available during the design phase from contractor's design/build subcontractors.
• Allows preliminary construction to take place under the contractor's supervision.

Disadvantages:

• May not yield the absolute "lowest price'

III. Design / build construction ( In the T.I. venue)

Frequently used by tenant improvement contractors and their clients, this contract model best suits the busy customer who wants to spend a minimum of time and money on design development and bidding. Based on relatively simple sketches and performance specifications, the contractor, assisted by his subcontractors, will submit a design/build price for the project. If awarded the project the contractor will hire the design professionals to complete city submittals for permitting and will build the project for the sum proposed. Design/build is a common delivery system for building owners building their tenant's interiors. The contract remuneration may be 'stipulated sum' or 'cost plus with guaranteed maximum'.

Advantages:

• Drastically reduces the resource commitment on the part of the client.
• Delivery of construction accelerated by placing the contractor in charge of the design as well as the construction.
• Allows preliminary construction to take place under the contractor's supervision.

Disadvantages:

• Contractor must be experienced in design- build construction and familiar with the client's (or his building's) quality standards.
• Depending on scope complexity it may be difficult to evaluate competing proposals.

The American Institute of Architects is an excellent source for the contract forms that establish and support these relationships. There are several variations of these contracts that further customize the working environment for the client and his contractor. T here are more than 80 contracts and administrative forms available from the A.I.A. in both print and electronic versions which can be ordered through their web site at www.aia.org or through the local office of the A.I.A. in San Jose Ca. located at 325 S. First Street , Suite 100 , San Jose CA 95113 (408) 298-0611