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