What Is A Contract

A contract binds two parties together with each party having certain obligations to the other. The construction manager/general contractor (CM/GC) has an obligation to complete a project within a certain period, with good quality, and at a definitive cost. The owner has the obligation to provide technical documents, the site, permits (in certain cases), adjacent property approvals, and to pay the contractor in an expeditious manner when invoices are submitted (on a regular basis). The objective of the owner when constructing a facility is to obtain quality workmanship at the lowest possible price. The secondary objective is to have the facility completed within a satisfactory period.

Many forms of contracts are used to make sure that the owner's objectives are achieved. The American Institute of Architects' (AIA) documents are used extensively throughout the construction industry. Other types of contract forms are available from trade organizations such as the Associated General Contractors of America and the Contractors Association of America. Whatever forms are used, it is important to understand that they are only a starting point and the CM/GC's lawyers must review them for potential risks and applicability to the project at hand. In addition to the base contract, two other sections of the contract form the total contract. These are the general conditions and supplemental conditions. They are the real "teeth" of the contract.

The project manager (PM) must also review and understand all construction contracts and the associated general conditions and supplemental conditions. Many sections of the contract have a profound impact on the direction and completion of a project. In most cases, the contract is not looked at again. When a contract is initially read, not all of the elements are understood. Therefore, it behooves all PMs to read the contract several times. However, when a problem arises, the first document to come out is the contract (see Exhibit 9-1, contract flowchart).

Exhibit 9-1

Contracts flowchart.


Type of contract submitted by the owner

CM/GC must evaluate the contract in terms of risk

The most prevalent forms of contracts include stipulated sum (lump sum), cost plus, guaranteed maximum price (GMP), construction management, construction management with risk, construction management with no risk, unit price, and time and material (T&M). Hybrid forms of these contracts are usually the rule, not the exception, as one might surmise. In the theoretical world, the cost of constructing a particular facility should generally be the same, no matter what form of contract you use. However, in the real world, you only have the opportunity to choose one form of contract (or hybrid). Thus, it is almost impossible to state that one type of construction contract would be more advantageous than another type. The only way this could be done is if two identical projects were built at the same time on the same site, using different contracts with the same contractor. Each contract form has its place, depending upon the circumstances at the time of consideration. CM/GCs are usually given a contract by the owner. The owner will decide upon the contract to use based on the items listed in Exhibit 9-2.

When dealing with work in the urban environment, private owners prefer two major forms of contract. They are the GMP (as defined later in Types of Contracts section) and the construction management (as defined later in Types of Contracts section) contracts. The GMP provides the owner with a definitive price for the project. The actual construction can start early because of fast tracking. These two advantages give the owner the ability to assist in the financing of the project and to complete the project in an expeditious manner so that cash flow from the occupancy of the project can start earlier than under a normal construction contract.

The construction management contract provides the owner with the ability to analyze the cost and complexity of a project from conception to completion. This offers the owner the ability to construct the designed project at presumably the lowest cost and with a minimum of cost changes (excluding scope changes). It is also possible to start the project early by using fast tracking methods as indicated in Chapter 15. See Chapter 1 for the preconstruction services that are offered by construction management contracts.


Type of contract submitted by the owner

CM/GC must evaluate the contract in terms of risk

1. Quality of construction

2. Anticipated cost of the project

3. Schedule

Exhibit 9-2

Selection on the type of contract.

4. Company policy

5. Construction market conditions

6. Availability of good contractors and subcontractors

7. Size of the project

8. Inflation rate

9. Insurance consequences

10. Critical nature of the work

11. Union considerations

12. Renovation vs. new construction

13. Availability of owner's staff

14. Control of the project

15. Fast tracking (for better cash flow at the completion of the project)

16. Dictated by the legal department

17. Risk factors

18. Familiar with a form of contract

19. Lender's requirements

20. Local municipality requirements

The following is a brief description of each type of contract from the owner's prospective:

1. Stipulated sum (lump sum) (traditional method)

a. Procedures

• Drawings and specifications are complete (however, no construction documents are 100% complete).

• Documents are submitted to several contractors.

• GCs receive proposals from the various trade subcontractors.

• One price bid is received from each contractor.

• Contract is awarded for a lump sum (to the lowest responsible bidder) and a definitive completion date is agreed upon.

b. Advantages

• GC is responsible for all related construction tasks of the project.

• Total cost of the project (without changes) is determined initially.

• Constant auditing of the project is not required.

• Schedule is defined based on the completed documents.

• Owner has the option of selecting the lowest price.

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