CCK Lawyers practises extensively in building, construction and infrastructure law. We cover the full range of services that companies and individuals in the construction industry may require, including construction contracting.
Through our extensive experience in construction contracting we have identified the most effective strategies for principals to manage risk in a construction project. By far the most effective risk management tactic is to choose the appropriate contract model or ‘delivery method’ for the project.
The contract model describes how a project will be procured. It does so by allocating responsibility between the principal and the builder for key project elements such as design, cost management, and engagement of subcontractors.
This article describes the most common contract models used in the construction industry and summarises the advantages and disadvantages of each.
This article provides general information only and is not legal advice. Construction contract models are not ‘one size, fits all’ – the time, cost and quality outcomes required for each individual project will dictate the most appropriate model. It does not consider in detail collaborative contracting models such as alliancing and public private partnerships (or ‘PPPs’). Those models are usually only considered for relatively major infrastructure projects with complex risk profiles.
Traditional construct only, fixed price contract
The simplest way to engage builders is under a traditional fixed price lump sum, ‘construct only’ contract (sometimes known as ‘hard money’). This approach is best suited to projects with relatively simple designs.
Under this model, the principal will engage consultants (architect and others) to produce a complete design and specification, and a builder to build the completed design for a fixed price.
Usually, the principal will seek tenders from several potential builders. The principal will provide tenderers with a complete design to price. Tenderers may propose ‘value engineering’ changes to design or material selections to provide cost savings, but the principal retains all rights to approve or reject these proposals.
The builder’s responsibility will be limited to performance of the work on time and to specification. The builder will engage any subcontractors and procure all materials. The builder takes the risk of any cost overruns, and obtains the benefit of any savings.
The builder will not be responsible for any design work, any changes in design or selected materials, or any errors or inconsistencies in the design. Any scope or design changes will be treated as variations, and may increase the price, the time to complete the work, or both.
A number of well-known standard forms are available for this contract model, such as AS2124–1992 and AS4000–1997.
There are many advantages to this model, including the fact that it is simple and well understood with the principal retaining more control over the design. Additionally, the risk is lower for the builder, allowing the builder’s price to be lower than other models.
As with any contract model however, there are also disadvantages to a construction fixed price contract, especially around the coordination of the design and construction process. The fixed price contract allows less clarity around which party is responsible for both design and construction. There is also less ability to take advantage of possible construction efficiencies in the design process, with any change or development to the design being likely to cause a cost increase. In addition to this, the need for a complete design before contract may delay completion of the project.
Design and construct contract (D&C)
Design and construct (often called ‘D&C’) is a very common modern construction contract model.
Under this model, the principal will typically engage consultants (architects and others) to produce a preliminary design and specification that set out the principal’s project requirements, and then engage a builder to complete the design to a standard ready for construction, and to build that design for a fixed price.
The main difference between a traditional contract and a D&C arrangement is that under a design and construct contract the builder will take on the obligations and the risk of design work. However, the builder will have the freedom to design and construct the building in any way it wishes, as long as the final design meets the principal’s project requirements and is consistent with the preliminary design.
The contract will specify the degree of control that the principal will retain to approve or reject design elements or selection of materials. If the project requirements are clear, the principal can retain substantial (but not total) control.
The builder will engage any subcontractors and procure all materials. The original consultant contracts may also be novated to the builder so that the builder will assume liability for their work. The builder will typically bear any cost overruns.
The builder’s responsibility will include every aspect of construction, and also completion on time. Because the builder is responsible for both design and construction, there is less scope for argument about who is ultimately responsible for any defects.
The builder will be responsible for any changes in design or selected materials, except for a change in the principal’s project requirements. Any changes to the principal’s project requirements will be variations and may increase the price and the time to complete the work.
A number of standard form contracts are available, including AS4902–2000 and AS4903–2000. These contracts are similar in format and risk allocation to the AS4000–1997 contract.
The advantages of a D&C contract are mostly due to the design and construction being completed and carried out by a single entity. The builder is the single point of responsibility for both design and construction, preparing the design with construction efficiencies in mind. Often variations related to the design are reduced and often construction can commence before designs are finalised, allowing a faster delivery.
However, the fixed price may be higher overall, reflecting the builder’s increased risk on the design process. The principal may also have less control over the final design, an issue which can be mitigated through contractual terms and ensuring quality elements in the preliminary design. Additionally, if the principal is closely involved in design development, there may be disagreement about what is ordinary design development and what is a variation from the project requirements. Less sophisticated builders may fail to understand this distinction and incur significant costs that they expect to recover as variations, but later find they are not entitled to be paid. This can lead to disputes, and cash flow problems for builders.
Early contractor involvement (ECI)
Early contractor involvement (often called ‘ECI’) allows builders to have input into a project much earlier than a traditional delivery method such as construct only or design and construct.
This can provide significant benefits for a project, especially in terms of project delivery time and value engineering. This model can also foster a closer and less adversarial approach, similar to more elaborate collaborative contract models.
Commonly, this model involves a two-stage process. In the first stage, the builder will work with the principal’s consultants to develop the project design from a very early stage, based on a general design brief. The builder will usually be engaged for a fixed fee. The second stage will typically be a lump sum design and construct contract or a guaranteed maximum price managing contractor arrangement, based on the design developed in the first stage.
There are many advantages to an ECI contract including the fact that construction may be fast tracked. Early work packages and material orders can commence while the design and scoping of other packages continues, without the need to ‘lock’ the design at a particular stage of development for a design and construct tender process. Early builder involvement benefits the principal by maximising innovation, program flexibility and opportunities to identify cost savings. Input from principals in early contractor involvement can also be valuable for a builder. In particular, principals with their own well-developed supply chains may be able to create efficiencies that the builder cannot.
ECI contracts also tend to be less adversarial and more collaborative, which is attractive not only to contractors but also to principals, as it allows the principal greater transparency over actual trade and subcontractor pricing.
While ECI contracts have many advantages to both principal and builder they are not without their disadvantages. With an ECI contract it is critical to ensure that the design brief ‘locks in’ at a very early stage of development any key outcomes that the principal requires. There is also no standard form contract for ECI models as they generally must be specifically tailored for the project. Moreover, while some ECI models allow the principal not to proceed with the ECI builder at the second stage, introducing a new builder after an ECI process can cause significant cost and delay.
Managing contractor or construction management
Managing contractor and construction management are two alternative construction contract models which share a number of similarities. They may be suitable for the principal’s needs in some circumstances, particularly where there are several projects under way concurrently, or where there is a need to fast track a large project.
Under both models, the principal will directly engage a construction manager (typically a builder) to coordinate and manage the whole process of design and construction from the very early stages. The principal will work collaboratively with the construction manager during the design phase.
The main difference between these two models is that a managing contractor eventually will engage consultants and subcontractors in ‘packages’ and assume responsibility similar to that of a builder under a design and construct model; whereas a construction manager will only be responsible for managing the consultants and contractors. ‘Packages’ will be contracted directly with the principal, and the construction manager will not normally be responsible for the cost and time to deliver the project as a whole.
A major advantage of these models is that they facilitate early contractor involvement. Early contractor involvement allows the builder to provide expert advice in selecting consultants and subcontractors, as well as advising the contractor throughout the building process. In addition these models allow the principal flexibility to vary individual package contracts without incurring the cost and delays associated with amending the head contract while also being the lowest risk model for the builder, and thereby possibly further lowering the price of the project.
While these models may be more costly in terms of the principal’s contract administration costs, costs of the project as a whole may be lower. However, particularly under construction management, the principal assumes the total project cost risk because there is no head contractor with a fixed price contract. That said, subcontract packages are often fixed price, which limits the principal’s risk.
While this article describes some of the advantages and disadvantages to the most common contract models used in the construction industry it is not legal advice. These contracts are not universal, and CCK Lawyers suggests you consult with a legal professional before entering into any contract.
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