Construction contract types and

risk profile
August 2012

Purpose

The purpose of this paper is to provide an overview of the

different types of contracts that Lend Lease executes in its
construction business.

The paper provides a description of each contract and the nature

of the risk exposure inherent within each contract. It also
provides an overview of the more common contract pricing
mechanisms.

This paper does not address the specific risk profile of every
project disclosed as operating in accordance with a particular
contract type.
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Pricing structures

Two common pricing structures for construction contracts (most commonly design and
construct contracts):
Guaranteed maximum price (GMP) Lend Lease provides a ceiling price for the contract.
The contract price reflects the actual cost plus a fixed fee. If this contract price varies from
the GMP:

Costs exceed the GMP - Lend Lease is at risk and responsible for the additional costs.
Costs are less than the GMP the client and Lend Lease will share the benefit of the
cost savings based upon a agreed formula.
Lump sum a fixed price offered by Lend Lease to the client to perform an agreed service
or deliver an agreed scope of works. If the total costs vary from the lump sum price:
Costs exceed the lump sum price Lend Lease bears the full cost.

Costs are lower than the lump sum price Lend Lease benefits from the full cost
savings.
In both these types of contracts, variations (including changes in the project scope) are excluded
from the original lump sum price and GMP.
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Contract types
Contract type

Description

Project
management
consultancy

Lend Lease provides project management, programme

management and/or consulting services with risk
limited to staff and project overhead costs.

Design
risk?

Example

BP Retail, Europe
KL Eco City, Malaysia

Athletes Village, UK

There is no project delivery or subcontracting risk.

Construction
management

Lend Lease acts as the construction manager to the

client in the management of construction activities of
the project.
While risk is taken on the cost of the management, the
time and cost of the project is typically not the risk of
the construction manager.
Trade cost not recognised through Lend Leases
books.

Contract types
Contract type

Description

Managing
contractor
(not GMP)

Lend Lease manages the design and construction of

the project and is responsible for managing the
execution of contractors and suppliers.

Design
risk?

Example

Queensland Childrens
Hospital, Brisbane
(stage 2)

Merck New
Manufacturing Base,
China

Fee structure is usually a variable contract price based

on reimbursement of actual costs incurred for trade
contractors plus a fixed fee for overhead and margin.

EPCM
Engineering,
Procurement
Construction
Management

Lend Lease undertakes the engineering design,

procurement and construction management (see
construction management slide 4) of the trade and
services contractors required to deliver the projects.

Contract types
Contract type

Description

Alliance

Lend Lease is part of an alliance team (usually

comprising participants with different skills and
expertise) with the client and specialist consultants to
plan and deliver the project. The alliance team agrees
key performance indicators (KPIs) against which the
performance of the alliance will be measured.

Design
risk?

Example
Pacific National coal
rolling stock
maintenance facility
near Nebo, QLD
(Abigroup)
Ipswich Motorway,
Origin Alliance

Performance against KPIs impact the contractors

remuneration:
Outperformance gain share
Underperformance pain share limited to loss of
the project margin.
Alliance contracts are common where there is a
significant level of uncertainty in respect of the scope
and cost of a project in the tendering process.

Contract types
Contract
type

Description

Design
risk?

Example

Construction
management at
risk

Lend Lease undertakes the procurement of services and

trades for construction. On completion of the
procurement of a high percentage of trade costs, risk is
then taken on for delivering the project for the agreed time
and cost.

57th Street Carnegie

Schedule of
rates

Amount payable to Lend Lease as a contractor is

calculated by applying an agreed schedule of rates to the
quantity of work performed.
In other words, payment is made on a fixed amount per
unit of output .

NBN passive fibre

network rollout SA, NT
Holbrook Bypass

Lend Lease takes risk on the estimation of the output

volume, the accuracy of which affects the rate per unit
and recovery of overheads and margin.
Construct only

Lend Lease provides construction only services according

to the clients design.
Usually a lump sum price contract.

Contract types
Contract type

Description

Design and
construct (also
known as Design
build)

Lend Lease designs and constructs the project in

accordance with the customers project brief.
Design consultants, suppliers & subcontractors are all
engaged and managed by Lend Lease.

- Two stage

1)

2)

Fee is paid to manage the design and procure

early trade and services.
Once the design is sufficiently advanced, a lump
sum price or a GMP is agreed to complete the
work.
By the time this second stage is agreed, the
design documentation is more advanced than a
single stage Design & Construct, which
theoretically should improve the robustness of
the time and cost estimate.

Design
risk?

Example

Darling Quarter
(GMP)
Typical of US D&C
projects
(infrastructure
development)

Contract types
Contract type

Description

- Single stage

Preliminary design is completed by the client. Lend

Lease then completes the design and then
construction of the project for an agreed price and
schedule.

Design consultants, suppliers & subcontractors are all

engaged and managed by Lend Lease.

Design
risk?

Example
The New Royal
Childrens Hospital,
Vic (lump sum)
Peninsula Link , Vic
Public Private
Partnerships
including:
- Lancashire Schools,
UK
- Sunshine Coast
University Hospital,
QLD

Risk profile of contracts

Construction
Management

No design
responsibility

Design
responsibility

Project
Mngt
Consultancy

Construction
Mngt
@ Risk
Managing
Contractor
(not GMP)

EPCM

Schedule
of Rates

Alliance

Construct
Only
two stage

Construct
only
single
stage

Two stage
Design &
Construct

Single
stage
Design &
Construct

Increasing risk in execution phase being retained by contractor

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