Construction Management

CIVE 421
Fall 2022
Dr. Issam Srour
Housekeeping

 Term Project

 Further reading
 Article in Al-Mouhandess on Moodle
Construction and Contracts

 Construction is a product oriented activity

with many dimensions
 One of these dimensions is the business side

 Business world is structured by contractual

relationships
 Who plays a central role in contracting in
construction?
Construction and Contracts

 What is a contract?
 An agreement between two or more parties to
do something for a consideration
 A promise for the breach of which the law
recognizes duty
 Does it have to be in writing?

 Contract language in construction has been

normalized over years
 A variety of standard contract forms have
developed
Construction and Contracts

 Contracting process of construction is

unique

 How so?
 Finished product is not available for
inspection
 Product is bought from multiple sources
Two General Processes for
Construction Contracts

 Competitively bid = most widely used form

of contract, especially for public type
projects
 Examples
 Why is it a requirement for public projects?
 Two main categories are “lumpsum” and
“unit price”

 Second most widely used format is

“negotiated contract” typically cost-plus
Competitively Bid Contract

How it works

Owner invites a quote for the work to be performed based

on complete plans and specifications
Award is generally to “lowest responsible bidder”
Factors that determine whether contractor is responsible
 Technical competence and experience
 Current financial position
 Bonding capacity
 Current amount of work under way
 Past history of claims litigation
 Defaults on previous contracts
Lmpsum Contract

How it works

Contractor quotes one price covering all work and

services
Price includes contractor’s direct (labor, materials) and
indirect costs (field and main office supervision and
overhead, profit)
Amount is paid through progress payments based on
percent of work completed
Why pay in progress payments rather than one payment at
the end of the project?
Lump-Sum Contract

Advantages

Possibility to fix client budget, since construction price is

set at end of bid phase
All bidders are treated equally
Possibility to judge feasibility of duration and to fix it as well
Reduced risk from price fluctuations

Disadvantages

Fully fledged design drawings and specs are needed

before tendering
Normally, tendering will be on the whole job, and start of
construction is contingent on concluding the bidding
stage
Not flexible
Contractor’s allocated contingency is relatively high
Unit Price Contract

How it works
Project is broken down into work items that can be
characterized by units
Contractor quotes price by units rather than single total price
Low bidder is determined by summing the total amount for
each of the work items
Unit Price Contract

How it works
Unit-price quotations are based on the guide quantity
specified
Unit price includes direct and indirect costs
Progress payments are based on precise
measurement of field quantities
How important is the accuracy of the quantities?
 Most unit-price contracts provide for a price
renegotiation in the event that actual field quantity
deviates significantly (e.g. 10%) from guide quantity
specified
 To whom is this more important: owner or contractor?
Unit Price Contract

Advantages
Allows some flexibility: estimated quantities are to
be re-measured
Risk of quantity variation is not accounted for in the
contingency allocation of the contractor’s price
BOQ is fully developed
What type of projects lend themselves into UP?

Disadvantages
Budget is not completely fixed
It gives room for bid unbalancing to be exercised
Project Expenditure/Income
Unbalanced Bid Income Profile
Income Profile With Mobilization
Payment
(Cost + Fee) Contract

How it works

Owner invites selected contractors to review

project documentation
Each contractor is invited to present its
qualifications, fee, and an estimated cost
List is reduced to two or three contractors and
finally a winner is chosen
Reimbursement
 All direct expenses for labor, equipment, and
materials + overhead charges
 A profit or markup
(Cost + Fee) Contract

How it works

Fee structures
 Cost + percent of cost
• Lucrative for the contractor
 Cost + fixed fee
• Determined as a percent of an originally
estimated total cost figure
• This gives the contractor an incentive to get the
job done in the shortest time frame
(Cost + Fee) Contract

How it works

Fee structures
 Cost + fixed fee plus profit-sharing clause
• Provides reward to the contractor to control cost
• Common sharing formula: 25/75
• Target value can sometime be defined as a
guaranteed maximum (GMP)
• What does it take to have a GMP?
 Cost + sliding fee
• Penalizing contractor for overrunning target
value
(Cost + Fee) Contract

Advantages

No delay to start of construction (construction of a

package may start as soon as the construction
documents are produced for that package)
Fixed contractor profit margin

Disadvantages

Administrative complexity
Budget is not fixed before hand
- Mitigation?