Construction Management Contracts - What Are They?

Continuing the series of blogs on various forms of building contracts, today's topic is "Construction Management" contracts.

There are two main forms of Construction Management ("CM") contracts; Agency and Non-Agency. But before we dive into the differences between these, lets take a look at what CM actually is.

CM is where a builder delivers the building by managing a construction budget as opposed to delivering the building for a fixed lump sum (as per a traditional form of contract). Effectively the builder (or more appropriately termed "construction manager") simply manages the delivery of the built form without taking risk and without the opportunity to improve profits.

CM is regularly used throughout the building industry as a means of fast tracking construction delivery times.

Consider the process that a client must undertake for a building to be delivered under a traditional form of contract. First a client must fully design it, then they must tender the design and negotiate a contract, and finally they must administer the building contract to completion.

With CM the client selects a construction manager, negotiates a contract and budget for the proposed works based upon preliminary design documents and then the client and construction manager work together to complete the necessary design and deliver the building for the agreed budget or less where possible.

With CM a client has the opportunity to save cost through reduced design, through packaged trade tendering of building work and reduced holding costs due to fast track delivery methodology.

There are risks for the client if they select the wrong construction manager or fail to manage the design consultants. Further, if trade tenders do not meet expectations and the client is forced to accept the tendered sum to achieve a certain standard, then the client may exceed part of their budget.

There are ways of managing risk. A client can agree a guaranteed maximum price ("GMP") with the construction manager whereby they agree that the maximum the client will pay is limited to a certain value.

Usually this form of price ceiling is matched with a cost saving incentive such as a share of savings if the construction manager can deliver the project for under the agreed budget value. Perhaps the share of savings may be 50%.

A GMP with share of savings works well for both parties as it provides a ceiling for construction costs (which a financier may find more attractive), it provides an opportunity for the construction manager to make a reasonable profit increase, and it provides an incentive for the construction manager to save the client money.

As for which method of CM to use (i.e. Agency or Non-Agency) either is suitable. Agency simply means that the construction manager executes trade contracts on the client's behalf as their "Agent" where the Trade Contractor is engaged by the Client. The Non-Agency method requires the construction manager to engage the trade contractor directly.

Agency method results in risk for the client but not the construction manager whereas Non-Agency places risk on the construction manager.

When time is critical, CM is an excellent possibility for a client; it is less adversarial than a traditional form of contract and provides opportunities for all parties to profit.

My experience in business tells me that when everyone can make a profit there will be a successful outcome for all.

For more information please visit the LEFTA website.

Is A Design And Construct Building Contract Right For You?

My last post discussed the traditional form of building contract; the lump sum or fixed price contract (which is also called a "hard dollar" contract). 

This post discusses the "Design and Construct" form of building contract ("D&C").

So what is a D&C? This form of building contract requires the builder/contractor to not only build the project, it also makes them responsible for the design of the building project.

This sounds quite simple but most people see risk in having their builder design their project. I agree to a certain extent however this is where commercial requirements and risk management must be applied.

First you must understand the benefits and risks associated with a D&C. The D&C contract is not for everyone but it is very useful in numerous circumstances.

Why would you consider using a D&C? 

Time and cost are two major reasons why you should consider D&C. Let's discuss time first.

To undertake a traditional form of building contract tender, all your project documentation has to be complete (and error, omission and ambiguity free) and you must already have your authority approvals in place. To do all these things takes substantial time and the cost required to fully document a project is substantial.

For your project you must consider the value associated with time. If time is expensive (eg your holding costs are high) you may wish to consider a D&C for the time benefits.

If time is a risk to your project then a D&C may also be a worthwhile option for you to consider.

Cost is usually a substantial consideration for most people. When preparing documents for a project substantial cost can be incurred. Design costs vary between types of projects however these costs are always substantial.

The cost of time must also be considered when creating fully documented projects.

How does a D&C benefit time and cost?

To tender a D&C building contract you only need to have undertaken a preliminary design and created a design brief that nominates your design requirements.

You can make it the builder's obligation to obtain authority approvals too.

Essentially, instead of you having to create a fully documented design, you create preliminary design only and produce a design brief. You may also wish to nominate a similar building to what you wish to achieve as a "benchmark building" that the builder will need to use to benchmark their design from.

This takes you substantially less time and your design costs are minimal.

Once you have appointed a D&C contractor they become responsible for engaging the design consultants for the project. They design whilst they build, which saves time (and is known as "fast tracking") and they do not have to create as much documentation as you would have needed for a traditional contract as there is no requirement to prevent builder variations; if the builder's design has an error, ambiguity or omission then it is at the builder's own risk, not yours.

Last year I was involved in a $25 million building using a D&C which proves that this form of contract can be used for large projects. I have also been involved in smaller $4 million projects. The price versatility of the D&C is substantial.

But what about the risks?

In my view the single largest risk in D&C is getting your design brief wrong. If you do this you have created a substantial problem for yourself. It is essential that you get your design brief right.

The next largest risk is the selection of a suitably experienced D&C contractor to deliver your project.

If you select a builder that doesn't have experience in D&C delivery, who doesn't know how to manage design and design consultants, and how to build whilst designing, then this can end in real issues also. However if you find the right contractor you have the recipe for success.

If your project is complex and has a highly specialised end use then you may also feel that D&C is too high risk.

In circumstances such as this you may be correct however this does not mean that the traditional building contract is the appropriate contract for your project. There are many other forms of contract that you might like to use.

In upcoming blogs I will discuss the Construction Management form of building contract. This is another form of project delivery regularly utilised to deliver projects.

For more information and our contact details please visit the LEFTA Website.

Is a Fixed Price Building Contract Right for You?

For most people they only know one form of building contract, the fixed price. This is also known as a lump sum or hard dollar building contract.

But did you know there are many different forms of building contract that you can use?

In my 29 August 2012 blog I shared the different types of building contracts and said that I would elaborate on each type in upcoming blog posts. In this post I will discuss the fixed price building contract that most people use on their home renovations.

The fixed price contract is the traditional method of engaging building contractors; it requires the builder to provide a fixed lump sum price usually in a competitive tendering situation.

The highly competitive nature of a tender is likely to result in a good price result for the owner but what this means is that the builder has a very small profit margin. If the builder then makes a few mistakes as the project progresses and a couple of subcontractor or supplier prices are more than the builder's budget then there is limited scope for the builder to absorb cost blow-outs.

So where does that leave the owner? Assuming the builder does not liquidate, go bankrupt or some other form of arrangement with its creditors, the builder will become very active in seeking additional monies from the owner via variations and delays.

In short, this form of building contract is highly adversarial but gives good certainty of cost. But cost certainty will only come if the documents included in the building contract are good, appropriately describe the scope of works and do not have errors and omissions which would lead to delay and variations claims.

I have seen how a fixed price contract has gone very wrong due to poor documentation, wrong for the owner that is, not the builder.

But if the documents are good then there is limited scope for price change and the owner is able to have cost certainty for their budgets.

For a property owner the secret is to ensure that the documents are complete, do not have errors, ambiguities and omissions, and are properly coordinated between teh various consultant designers.

On the other hand, for the builders the secret is to go through the project documents "with a fine tooth comb" right at the outset to find out where the opportunities lie.

If the building contract has been well prepared the builder will have had appropriate documents to tender from and can only blame themselves if their pricing was wrong.

This is not my preferred form of building contract, but more on that in further upcoming posts.

LEFTA Website

Which Type of Building Contract Should I Use?

Did you know there are many different types of building contracts that can be used for a building project?

Choosing the right building contract can save you a lot of money, time and stress.

We all know about the typical one, the lump sum or fixed price building contract. This is the traditional method used for project delivery over the past and presently but it is not the only one.

It may also be the wrong one for the project you are thinking of undertaking!

In total there are five (5) different forms of building contracts:

1. Lump Sum/Fixed Price (Traditional method);
2. Design and Construct;
3. Construction Management;
4. Project Management; and
5. Public Private Partnerships / Strategic Alliances

Each of these forms of "agreement" does different things, provides various opportunities and have differing risk profiles.

Subject to what it is you are intending to develop on your land, the time-frame you have to deliver it, your budget, and your in-house capabilities and resources to manage your project, you may wish to consider the varying advantages and disadvantages of each method of delivery.

In upcoming posts I will detail some information in relation to each of these forms of delivery for you to consider.

Visit the LEFTA website

Strata Dispute Involving A Marina

Ten years ago I was given a project recovery role on a waterfront property development involving luxury apartments, a large marina and some marine related commercial suites.

There was a complex strata plan due to all these competing uses which took substantial time to organize.

On top of this the By-Laws were purpose written to ensure all details were accounted for.

Now I understand that the marina owners are in dispute with the apartment and commercial suite owners regarding the allocation of costs for repairs, maintenance and operations.

Given we are talking about people with a reasonable asset backing and therefore some business acumen, it appears odd that the basis for the dispute would arise.

It seems that nobody has read the By-Laws or their original Contract For Sale of Land (or marina berth) where all the required information is contained. The entire process is clearly identified and everyone purchased their property on this basis.

This appears to be an unnecessary dispute that only feeds the lawyers pockets and clutters the courts.

For those who have raised the dispute it may end up being a very expensive exercise if they cannot prove their case.

If you become involved in any potential for dispute have a very close look at what you are going to argue about. Read the contract or agreement and try to settle the dispute promptly. If all else fails try mediation. If that fails then there is little other choice but litigation.

Litigation is very expensive and should be avoided wherever possible. What if you lost?

http://www.lefta.com.au

Property development - learning

I have just completed facilitating a 3 day advanced property development training course.

During the course a number of experts attended and spoke on their respective disciplines.

It always amazes me how many intelligent people there are in every facet of my industry.

But what's more impressive is the number of people that want to expand their knowledge base by attending these courses.

The continual pursuit of knowledge via deliberate learning is truly amazing!

By facilitating these courses I too learn both about my industry and about people.

The key point I make is that you should always seek professional expertise when you are not experienced at something. I do, and I've been in my industry for more than 30 years. I know when something is outside my core skill area.

Don't start a proposed development without appropriate advice; it could be very costly!!!

http://www.lefta.com.au

Building problem - builder designing home

I was asked today whether a home owner that engaged a builder to design, gain authority approvals and then to build their new home can stop the process once the design is finished and get someone else to finish it.

My answer? Depends! It all depends on what the contract says.

Let's assume the contract says you can terminate the contract at any stage as long as you have paid for their services up to that stage.

Can you get someone else to do it then? Answer? Depends!

So what does it depend on this time? Answer? The contract!

What does the contract say about Moral Rights, Intellectual Property Rights and Copyright?

OMG! You need to be a lawyer! Well that's not quite right, you only need one...

The point I'm trying to make is this, be very careful what you sign and make sure you understand what your obligations are (and the other entities obligations also).

If you are doing something that you are not experienced in, get help before you need help.

http://www.lefta.com.au