Contractor compliance, schedule performance, site to office progress accuracy, quality of work performed, budgeted contingencies and administrative/billing efficiency. These are the themes that will be discussed when taking a closer look at project performance and various agreement types. We will look at the different categories of contracts and how they are being applied. In some cases, we see a variety of all three contract types on one contract or bid form. In the digital age of data, these metrics can be calculated in real-time and useful in day-to-day strategy analysis and guiding principles for best practices.
Depending on who you ask there are 4 types of contracts commonly used in construction; each with various pros and cons, and best use scenarios. Lump-Sum or fixed-price contracts are seen the most and are ideal for general contractors and their subcontractors for projects where design is complete and the scope of work is clearly defined. A cost-plus contract or cost-reimbursement contract will take the direct cost of material and labour PLUS a percentage of the cost, fixed fee, incentive or award based on performance metrics. Time and Material (t+m) contracts are very similar however the rates for material and labour will each have a transparent mark-up. Unit price or itemized contracts are also called a (re)measurement contract. These are an excellent choice for projects that involve repetitive tasks and resources that are easily quantifiable. Line items of work will cover all labour, material, overhead, mark-up/profit, taxes, permit and inspection costs.
Risk and Reward:
Lump-sum contracts are a great way to reduce the risk for the project owners, contractors are motivated to get the work done fast, in turn, increasing project performance and contractor productivity. Additionally evaluating lump-sum bids and selecting contractors is relatively easy. Inspecting work completed and partial payments for work completed can be hard to assess.
Cost Plus contracts tend to deliver higher quality results as the contractor has an incentive to select the best materials and labour. With contractors risk reduced, bids will often be lower compared to a fixed price contract as there is less worry about material cost variance. Greater supervision is required due to contractors’ apathy to cost control.
Clients choosing a T+M contract model will take on the biggest risk without a clear understanding of the total cost. The likelihood of a dispute is increased however estimating overhead and contractor cost-cutting can be minimized.
Unit price contracts provide mutual benefits for the owner and the contractor. If the owner has selected a “good” consultant they can be confident in quantity take-offs and accurate schedule estimates. As rates for work are pre-determined, construction can commence before the full design is complete. This is ideal for projects where the scope of work can not be clearly defined until preliminary construction activities are complete. For monthly progress billing, unit price contracts are the best when quantifying the work performed.
What’s so special about unit price contracts?:
Unit price contracts require a lot of upfront work for consultants and contractors. The key performance indicators such as profitability and schedule performance will be largely dictated by the estimating teams. But once these workflows are mastered, these companies will be able to unlock more accurate fiscal projections and safer bid submissions on lump-sum contracts. Due to comprehensive estimating workflows involved, these projects should be able to evaluate the most accurate production timelines and milestones.
To sum it all up, unit price contracts are well designed for projects with familiar materials and repetitive work units. This type of contract will yield high performance, competitive and compliant pricing in the bidding stage, and shared risk for all stakeholders. Some of the downfalls may arise when working on more complex projects and work is not perfectly defined for unit pricing (e.g. project with all different doors and door sizes… each openings’ install supply perimeters and material used would differ from the next.) Itemized contracts are often used in engineering, landscape architecture, low rise construction, and homebuilding. Homebuilders…really? Yes, the work per unit may not seem repetitive, but for builders offering a finite number of model options, it is useful in the grand scheme of things. In public works, you will often observe a multitude of lump sums for the estimated scope of work and supplementary unit pricing for provisional line items. These are tougher to estimate until work commences. (eg. geotechnical surveys are not perfectly accurate for gauging excavating/earthwork requirements)
Indicators of a well-estimated job can be found following tender analysis/ bid tabulation.
- If contractors pricing variance is tight
- Minimal non-compliant bids + erroneous submissions
- Limited Q+A and qualification notes
- Average variance with an estimated budget
Standardized Unit price contracts by Country:
- CCDC-4 2011
- Schedule of prices + Provisional Items
- specified unit of work performed.
- Canadian Construction Documents Committee
- Unit pricing Contract
- Application and Certificate for Payment – G702 (cover page)
- G703-1992 Continuation Sheet – Schedule of Values/line item appendix
- Bill of quantities + provisional rates
- AIA A101 2017
- American Institute of Architects
- Measured Term Contracts (MTC) “Measure and value” contract
- MTC 2016
- Units of work are separated into ‘Orders’ for each separate item and the employer supplies a written description or drawings for each Order where relevant.
- “Schedule of rates” + Quantities applied following progress inspections.
- The Joint Contract Tribunal
- Measured Term Contracts
- Australian Building Industry Contracts – a joint venture of Master Builders Australia Ltd and the Australian Institute of Architects (AIA).
- ABIC-MW-1- 2018,
- ABIC-BW-1-2018(for contracts up to $50K)
- Standards Australia – AS4000-1997
- AS4000 is designed for use on major building and engineering projects where a ‘superintendent’ is engaged to administer the contract. The superintendent may be an independent professional (or a firm of consultants) or an employee of the principal. The contract price may be calculated as a lump sum or re-measurement (schedule of rates/bill of quantities) or a combination of these.
- Royal Australian Institute of Architects (RAIA)
- ABIC MW-2018 (major works), with residential works variants for each State and Territory; designed for use with an architect as the principal’s representative.