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.
