Understanding Construction Management Agreements


Construction Management / The Basics

We have discussed the Construction Management method of building, within several different webpages on this website. Although this method of constructing a project has progressed and evolved during the last several years, there still remain basic types of Construction Management agreements, which can be summarized in order to understand the different variations of this technique.

To understand the concept of Construction Management, you must understand the answer to the following question.

Why would an owner or a developer decide to use Construction Management, in lieu of a competitive bid method of contracting?

  • Educated, professional owners and developers understand that the construction of any project could include contractors that will simply be in the business to make money, and cheat the system. The Construction Management method of building decreases the actual number of construction companies that cheat the system, and will promote a team approach to successfully completing the project in comparison to one player obtaining all of the spoils.

 

  • Timing is extremely critical to the project’s success, and it is imperative that the project be constructed in the most expeditious fashion possible. Construction Management will allow the interaction of contractor, architect and engineers during the development of the project and will establish the most efficient method of constructing the project. Construction Management allows the overlapping of project requirements, such as design development overlapping sitework development.

 

  • The owner understands that in many instances, the ability of a local contractor to identify the most proficient and economical procedure or process, providing mechanical, electrical or even structural success, is a very valuable commodity. This knowledge and information could be lost in the normal competitive bid process of constructing a project. Construction Management promotes communication and interaction between the design elements of the project and the actual contractors that are performing the work.

 

  • The owner understands that the process and work required by engineers and architects to complete a full and comprehensive set of construction documents for a difficult project, is extremely time consuming as well as technically demanding. If a Construction Management method of contracting the project is used, there is the ability to overlap the time to design and create with actual onsite construction. In addition, the architects and engineers will be assisted by the contractors in the implementation of the most efficient, and practical engineering and construction processes for the project.

 

  • The owner realizes that the competitive bid process creates and stimulates an overly competitive and aggressive “field of play” for the contractors. This will result in the continuous defending of alleged change orders and incomplete documentation. The lowest price will always cause difficulties in the actual construction of the project. Although, there will be arguments to this statement made by the aggressive and most competitive contractors, in my experience the acceptance of the lowest value, will provide you the lowest in performance and result. Competitive bidding in the open marketplace, in construction, will not result in the ultimate in performance and project success.

 

  • Construction Management allows the interaction of the owner, architect, engineers and contractors in the development of the project and the continuous introduction of new and innovative methods and procedures into the construction project. If a contractor has been successful using a new product or technique, this application can be discussed and possibly implemented in the current construction project.

 

  • The financial aspects of the project are more professionally managed and accounted for. The Construction Management procedures will allow the monthly processing of invoices, as well as a more comprehensive and honest evaluation of the financial projections on the project. In a normal Construction Management environment, the owner will require that all invoices, requisitions, etc. be included in a comprehensive monthly presentation by the contractor to the owner for monthly reimbursement. This assembly of data will more accurately control the financial status of the project and allow a more accurate projection of final costs.

These are only a few examples of why a project would be constructed by the Construction Management method of construction.

What are the BASIC Construction Management agreements that could be incorporated to construct a project?

  • Basic and simple Construction Management. This type of agreement is a basic understanding that the owner, architect and contractor will interact with each other to produce the project in the most efficient and professional manner possible. The basic agreement will include.

 

  • All costs incurred by the Construction Manager will be presented to the owner, developer or architect on a monthly basis, and they will be paid by the owner. These costs would be supported with invoices, payroll slips, delivery tickets, etc. that would legally support all the monthly costs on the project.
  • The scope of the work, would be directed and developed by the architect and engineers, and the Construction Manager would respond to all of the project documents issued by the architect and engineer, by pricing and evaluating the concepts with the owner for the benefit of all parties involved with the project.
  • The final cost would simply be the accumulation of all of the invoices, contractor requisitions, and costs that were required to complete the project. The final cost would not be established at the beginning of the project, costs would be discussed and basic financial concepts communicated between the owner, developer, contractor, etc. The Construction Manager would be responsible for identifying the financial progression of the project as well as, in most cases, a prediction of final project costs. There would be no legal financial aspect in the agreement.
  • The basic premise to the pure Construction Manager approach, is the total and complete acknowledgment, that the Construction Manager is a part of the team, and their interests are pure and responsible, therefore their input is always for the benefit of the team and the final completion of a successful and professional project.
  • The fee on this type of arrangement would be a negotiated fee, that the Construction Manager and the owner would negotiate and agree upon. The fee would be the decision of the owner, and would have nothing to do with the results on the project, which the Construction Manager had managed. This fee would normally be a percentage of the total cost of the project and would be distributed to the Construction Manager on a monthly basis, depending on the amount of billing incurred for that month. In most instances this fee would be a smaller fee than any agreement that actually placed the Construction Manager in a financially liable position.

 

  • Construction Management with a Fixed Fee.

 

  • All costs incurred by the Construction Manager will be presented to the owner, developer or architect on a monthly basis, and they will be paid. These costs would be supported with invoices, payroll slips, delivery tickets, etc. that would legally support all the monthly costs on the project.
  • The scope of the work, would be directed and developed by the architect and engineers, and the Construction Manager would respond to all of the project documents issued by the architect and engineer, by pricing and evaluating the concepts with the owner for the benefit of all parties involved with the project. The difference in this approach would be that the Construction Manager would require a more complete scope of work, as well as anticipated project duration, to establish the fixed fee for the project. The Construction Manager will need to be relatively confident of the final project cost as well as the final project duration, in order to establish and a fixed fee for the project.
  • The final cost would simply be the accumulation of all of the invoices, contractor requisitions, and costs that was required to complete the project. The difference in this approach would be that the Construction Manager would need to have a more specific idea of the final cost, as well as the time duration of the project, due to the need to identify a fixed fee for the project.
  • The basic premise to the pure Construction Manager approach, was the total and complete acknowledgment that the Construction Manager was a part of the team and their interests where both pure and responsible, therefore their input was always for the benefit of the team, and the final completion of a successful and professional project. But now there is a fixed fee introduced. This will require the Construction Manager to manage and account for the actual costs of the project and more importantly the time required to complete the project.
  • The fee on this type of arrangement would be a fixed fee, which the Construction Manager and the owner would negotiate and agree upon. This fee is now fixed, and is the result of negotiations between the owner and the contractor. The difference with this type of contract is that the Construction Manager is more committed to the timing of the project, due to the fixed fee.   This fee is no longer a percentage of the cost, but is a constant. Normally this fee is split up by percentage, based upon the billing for the month. However, it is not open ended and must be coordinated to last until the completion of the project.

 

  • Construction Management with a Guaranteed Maximum Price

 

  • Now we are moving out of the total Construction Management type of agreement, where the project is to be developed and constructed totally as a team. This type of Construction Management agreement is starting to apply the financial pressure of a competitive bid scenario on the project. In most cases, the Guaranteed Maximum Price established for the project will include a contingency on the bottom line.
  • The scope of work must be more accurately defined, to allow the Construction Manager to identify a guaranteed maximum price. The entire development of this Construction Management type of agreement is now starting to apply a precise financial responsibility on the Construction Manager, which is not present in the agreements described by the first two Construction Management
  • The final value of the project, is now noted as a guaranteed maximum price, and has been established and guaranteed by the Construction Manager on the project.
  • We have moved from the concept of pure Construction Management, to an agreement with more accountability for the final maximum price for the project.
  • The fee is based upon a percent of the value of the project. Although it was theoretically not fixed, it becomes fixed, due to the requirement to identify the maximum price of the project.

 

  • Construction Management with a Guaranteed Maximum Price and a Fixed Fee

 

  • This agreement is now developing further towards a more competitive bidding type of agreement, but still attempting to instill a feeling of involvement and team play for the contractor. This type of agreement is requiring basically the price for the project, as well as the fee to be charged by the contractor for the project. Although the term remains, guaranteed maximum price, the discussions and focus is becoming more closely associated with the final value of the project. Once the agreement has progressed to this level, the amount of the contingency and the final amount of the fee is more accurately established.
  • The scope of the work would need to be very clearly defined, and the ability to manage and develop this scope would be more limited to the architects and engineers on the project. The Construction Manager remains involved, but with the financial obligation of establishing a price the total and complete interaction is more limited. Although the contractor remains involved and a part of the team, once there is a guaranteed maximum price as well as a fixed fee, the concept of team play becomes somewhat foggy.
  • The final value of the project would be known, due to the requirement of this agreement, that the Construction Manager provide a guaranteed maximum price, which becomes basically the price for the project.
  • In an attempt to obtain both the price for the project, as well as the final fee to be charged by the Construction Manager, the movement from the pure Construction Management agreement, as well as the intent of the Construction Management concept, has now been reduced to guaranteeing the value and setting a fee for the management of the project.
  • The fee is set and established prior to the signing of the contract.

 

  • Shared savings clause.

Another interesting concept that can be added to the Construction Management agreements is the shared savings clause. This clause is an agreement that allows the Construction Manager to share any savings that occurs on the project. This shared savings clause is only implemented on the Construction Management agreements that required a guaranteed maximum value for the project. There are a few legal considerations that must be considered if a shared savings clause is included in the Construction Management agreement. Such considerations include whether any contingency money should be considered in the shared savings clause, as well as what occurs when there is a reduction in scope. For example if the structure originally incorporated four elevators, and the scope of work eventually was reduced to three elevators, how much, if any of this savings would be shared with the Construction Manager. In addition, if the Construction Manager included a contingency within the final guaranteed maximum pricing, how much of the savings of this contingency money should be included within the savings clause? There are many legal considerations, which require negotiation and decisions, when the shared savings clause is introduced into the Construction Management agreement.

So what evolved from the pure concept of Construction Management, as a method of contracting?

The Construction Management method disintegrated to the point that it moved directly back to the competitive bid scenario. The reason for this evolution was basically the desire to complete the project for the least amount of money possible, and in the shortest time period.

Although the intent of the Construction Management concept of project construction was initially intended to include contractors, architects, engineers and owners in a management technique that would inspire teamwork and success, the competitive nature of contractors took over. Sensing that there was an opening to denigrate the Construction Management process, by claiming substantial financial savings, if the old fashion method of competitive bidding was instituted, contractors were claiming that owners and developers would be much better served financially. This attitude was stimulated by contractors that did not have the expertise, personnel or the professionalism required to properly compete in the Construction Management marketplace. As I have noted in other webpages on this website, the most aggressive and competitive contractors are not normally the most skilled. In many case, like the schoolyard, the contractor that bullies, has an advantage over the more skilled and professional contractor, only due to the personae of the bully.

In addition to the introduction of contractors that were skillful at presenting low values for projects, and then making their financial gains with change orders and improperly managed projects, the economy started to lose momentum. The amount of money available for projects dwindled; the bottom line became the controlling factor in contractor selection. This environment fueled the ability for less professional and basically bottom feeder contractors, to gain a substantial portion of the major construction projects.

The pendulum does not remain on one side or the other for too long, and the tendency for all projects to be placed out to bid for competitive bidding purposes is starting to wane. There are more and more projects that are being designed and performed, using the Construction Management technique. As the economy improves, this tendency to use Construction Management as a building technique will also increase.

The Construction Management concept is an important one, and a professional method of constructing a major project. Let’s all hope that this method is resurrected, to enable owners and developers the ability to utilize the expertise of experienced and knowledgeable contractors, in the construction of their projects.