Construction Benefits Through Negotiation

Tenant improvements are commonly delivered by one of two methods:

The traditional 'Design/Bid/ Build' method or by means of a negotiated contract. The value of negotiating work with a contractor is illustrated by comparison of a hypothetical $500,000 improvement project with timelines under each scenario.

The Design - Bid - Build Project. The owner hires an architect to prepare drawings and specifications and, when these documents are completed, the project is put out to bid among several general contractors. During the design phase the architect prepares the construction documents and subcontracts the mechanical, electrical, plumbing, structural and Title 24 Energy engineering. The Design process in this model would take about seven weeks. Once the documents are complete they are issued to the bidders who would need a minimum of two weeks to prepare their bids and be followed by two weeks for the ownership to award the contract and the successful bidder to gear up. The project timeline in the Design - Bid - Build model will look like this:

This Design - Bid - Build process is inflexible and the activities are strictly consecutive. Its greatest advantage is that, depending on the number of general contractors responding to the request for quote, the owner may receive the cost benefit of their competition. However, potential cost savings can be wiped out by:

• Loss of rent or impact of other time sensitive issues and expenses
• Lack of proactive management during design phase, expanding its duration
• Over designing by the Architect’s engineers

The Negotiated Contract is a sensible alternative to the traditional method because it offers the owner the flexibility he needs to:

1. Run certain activities (with City approval) concurrently by performing demolition, below grade work, rough in electrical and mechanical and building of walls in parallel with the design process - reducing the project duration by as much as 35%.
2. Shift part of his management burden onto the contractor during the Pre-construction Phase. The contractor, as well as performing the pre-permit work, will facilitate the design efforts of his mechanical, electrical and plumbing subcontractors.
3. Take advantage of the contractor's planning, management and value engineering skills at the most critical point in the project's life: Pre-Construction.

The timeline for the same model project under a negotiated contract :

Negotiating a contract can produce impressive results in both cost and time savings.

A negotiated contract is executed at the start of Phase I and stipulates a fee structure for both Phases I and II. As Phase I ends - when the design is sufficiently complete to allow the subcontractors to submit lump sum proposals to the contractor- an amendment is issued by the contractor that establishes the Guaranteed Maximum Price (G.M.P.) The G.M.P. will be the total of the subcontractors’ proposals, the contractor's general conditions and, in some cases, a prudent contingency. There may also be a provision for distribution of any savings between owner and contractor if the project comes in under the G.M.P. 

At the end of the project the contractor is required to submit a complete accounting of his expenses and a fee recalculation if there has been a savings over the term of the project.

A common contractual form, for negotiation between owner and contractor, is The A.I.A. Standard Form Of Agreement Between Owner And Construction Manager Where The Construction Manager Is Also The Constructor (A121/CMc)