The Construction Contractor's Blog

Cost Plus Fee – Most owners will not utilize this type of contract except where the scope of work is either small or unknown, such as renovation or retrofit projects. This type of contract creates significant risk for the owner and minimal risk for the contractor. Generally, when this type of contract is used, it also contains a Guaranteed Maximum Price (GMP) to limit the owner’s risk.

Negotiated Contract – Price is negotiated on the premise that the owner will receive better service and performance as a result. Generally, the owner also has more say in the performance criteria in this type of contractual arrangement. This also allows the contractor to differentiate the value of their services on something other than price.

Competitive Bid – Often used in the public environment, this type of contract is awarded to the “lowest responsible bidder”. The primary concern here is price. Although its use has declined somewhat over time, it is still very frequently used. Competitive bids can be made through either an open or closed process. Closed bid procedures allow owners to be more selective in whom they invite to bid.

Delivery Method of Competitive Bid

General Contractor – With this type of delivery method, the owner hires an architect who designs the project. The design documents are used to solicit bids or to negotiate a price for the construction of the project. The architect monitors the contractor and ensures that the plans and specs are followed as directed. Any deviations from the documents must be approved by the architect. Typically, these jobs have longer duration than other delivery methods.

Construction Manager – Owners will often hire a representative who is knowledgeable of the construction process to manage the construction of their project. There are two types of CM contract methods: CM Agency is when a firm is hired to represent the owner but holds no subcontracts and is not legally responsible for the final cost or schedule of the project. Risk in this case is negligible. CM at Risk causes the contractor to take responsibility for managing the subcontractors and stipulating a final price and schedule to the owner. Although this is more risk for the contractor, it also allows for opportunities to generate cost savings and share those with the owner. This method also allows the contractor to be involved earlier in the pre-construction phase and create cost saving opportunities for the owner.

Design – Build – With this method, the owner has only one contract. It is for both the design and construction of the project. More and more owners are requesting this form of contracting and many are negotiated fixed fee arrangements. There is an increase in risk for the contractor since the entire team is now responsible for the design as well as the construction of the building.

Understanding the different types of contracts and their unique characteristics influence how projects are built and your contractual relationships with other parties on the project. These relationships are important in that they may dictate the amount of leverage you have in managing the construction of the project and your company’s overall performance.

Matt Stevens is a management consultant who works only with construction contractors. He can be reached at mstevens@stevensci.com His firm, Stevens Construction Institute is located at stevensci.com