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While construction contracts serves as a means of pricing construction, they also structure the allocation of risk to the various parties involved.
The construction field is a very extensive and unique in each project. In this world most of the projects are managed by contracts.
And as a principle to manage the project effectively we should first manage the contracts.
The owner has the sole power to decide what type of contract &delivery method should be used for a specific facility to be constructed and to set forth the terms in a contractual agreement.
A firm has to choose the right delivery method which is project to project base and present its bid offer to the engineer/client during tendering stage to enable it to present competitive price and win the project without compromising the functional and the quality of the project.
Choosing the right method to deliver the project will ease the project execution and give flexibility during construction as well as saving money and time for a firm and subsequently the same to the owner.
It is important to understand the risks of the contractors associated with different type of delivery methods.
In this instant you may ask what the contract delivery methods are and we should choose the right delivery methods.
Projects delivery methods.
There are three types of project delivery methods. In this section we will concentrate on design and Build because it s the best method for small and medium projects.
1- Tender or design-bid-build method
In this type the owner/client will choose engineer to design the whole project and get the
Approvals from authorities then floating tender to choose suitable contractor for the Construction under his supervision.
In this type of method the client /engineer has full control of the project and the contractor has to comply with full design given by the engineer.
Most suitable type of contract for this method is lump sum contract which the price given by the Contractor is fixed and the whole project is already designed and the scope of work is clear and fully detailed.
2-indefinite quantity contract method
Under this type of contract there shall be no design and it is based on maintenance or repairing projects.
Under this agreement the owner and the contractor will upfront set up prices for the labors and Equipments and markup etc
3- Design and build method.
The term "design-build" refers to a range of alternatives to the traditional project delivery system.
A useful way to look at design-build is by what it is not. Traditional design-bid-build is a segmented, sequential process in which the owner first contracts
With a design professional to prepare detailed, suitable-for-construction plans and specifications (or Sometimes has them prepared by its in-house engineers), then uses the detailed plans and Specifications to solicit competitive bids for construction, and finally awards the construction Contract to the low bidder.
Design-build' means a procurement process in which both the design and construction of
A project is procured from a single contractor.
Usually, the design-build contract is awarded by some process other than competitive bidding Providing the best value (in price, features, functions [and] life-cycle costs)
Thus, design-build differs from traditional design-bid-build in two ways. First, the design and construction components are packaged into a single contract. Second, the single contract is not necessarily awarded to the low bidder after competitive bidding
I-Why Design-Build? (Advantages)
Potential Cost Savings
Design-build has the potential to reduce over-all project cost because the design-build contractor performing the design has a better feel for the construction cost of various alternatives, Thus can come up with a design that is less expensive to build and has an incentive to do so. Another way to look at this advantage is that it moves value engineering "cost reduction incentive"
After contract award (with the contractor proposing cost-reduction ideas and sharing the savings with the owner) to pre-award (with the owner enjoying most of the cost savings).
B. Earlier Project Completion
Design-build may result in earlier completion and occupancy of the project because there is no Dead time between completion of design and start of construction. Further, the design-build Contractor can begin construction of early phases of the project (e.g. mobilization, site utilities, Foundations) before design of later phases (building envelope, interior partitions, HVAC, electrical) Is 100 percent complete? This process sometimes is referred to as "fast track."
C. Reduced Claims Exposure
Design-build eliminates the liability gap. Design professionals can obtain insurance coverage only for negligent errors and omissions, and virtually all design contracts limit the designer's liability to such.
However, there can be non-negligent errors and omissions, which cost the owner money but for which the design professional is not liable. For example, a design professional may undertake Reasonable subsurface investigations but fail to detect a rock outcropping that will require additional work.
In the traditional design-bid-build approach, the owner warrants the correctness of the plans and Specifications to the construction contractor.
There can be design mistakes for which the owner is liable to the construction contractor under the Warranty of correctness but cannot transfer the liability on to the design professional.
Even when the designer is in fact negligent, proving negligence can be difficult.
The owner must obtain a certificate of merit from another design professional and then prove that the designer failed to meet the applicable professional standard of care, which requires expert testimony.
On the other hand, the contractor usually can prove there was a defect in the plans that cost the Contractor money based on fact testimony alone.
Thus, the owner may have to bear the cost.
Design- build eliminates this gap because the design-bid build entity has no one but itself to blame For defective plans and specifications or differing site conditions.
D. New Technologies
Public Contracts usually prohibits brand-name or model-number specifications unless the
Specification lists at least two brand names and is followed by the phrase "or equal."
This makes it difficult for traditional design-bid-build to reach innovative, proprietary
Products where there may be only one brand-name and no equal.
Further, substitution of a new "or equal" product for a standard product often is impracticable Because of the ripple effect.
The designer designs the project around current generation Products and substitution of new "or equal" products after bidding can require revisions to structure, mechanical or electrical components to accommodate the new product.
Who is going to pay for these ripple changes? Design-build resolves this problem.
The design-build contractor selects the equipment (right down to make and model number) and Then designs the building around the selected equipment, which is a more logical way to proceed.
In fact, the design-build contractor can sometimes obtain free design assistance from equipment Manufacturers desiring that their new technologies be used.
E. Over-All Project Optimization
Design-bid-build can suffer from sub-optimization when individual project participants optimize their own positions, often at the expense of the over-all project.
The total cost to the owner of a building element, such as the steel frame, includes the cost of the engineering to determine the required steel sections plus the cost of the steel.
The designer has little incentive to use a sharp pencil to achieve the minimum amount of
Structural steel; he optimizes his own position by spending only the design time necessary to Ensure that there is enough steel to meet gravity and seismic loads, often by employing Conservative assumptions that may result in more steel than necessary.
So, the owner may save money on design but pay for it in steel.
With design-build, on the other hand, the design-build entity has an incentive to use the Optimum amount of engineering. As long as an additional dollar of engineering will save more than one dollar's worth of steel, the design-build contractor will spend the engineering time up To the point of diminishing returns when an additional dollar's worth of engineering saves only a Dollar s worth of steel because both the cost of design and the cost of steel come out of the same pocket.
This is not to say that design-build results in flimsy or less-safe structures. "More" (steel,
concrete, etc.) is not necessarily "better." Simply specifying extra steel or concrete in one place because the engineer does not have the time or incentive to calculate exactly how much is actually required does not improve the over-all performance of the building.
"A chain is only as strong as its weakest link." If the owner wants a building with higher floor Loadings, less floor deflection or resistance to a bigger earthquake than required by code, then The way to achieve this is by placing that requirement on the design-build entity up front not by Hoping that the designer will throw in some extra steel or concrete because he or she does not have time in the budget to use a sharp pencil.
F.Reduced Administrative Burden
Design-build may reduce the administrative burden on the owner because there is one solicitation, one award and one contract to administer.
G. Earlier Cost Visibility
The total cost of the project is apparent earlier with design-build. In traditional design-bid-build, Construction costs are not known until bid opening, and it is possible to spend money on a design that the agency cannot afford to build. All too often, construction bids exceed the budget, and the Project must be re-designed to bring it within the budget, thus delaying completion.
H. Agency CM with Multi-Prime Contracts
One of the advantages of design-build can be achieved by a construction management (CM) to Manage design and over-all project coordination and then contracting directly with several contractors, which are then managed by the CM.
Construction project management s services provided by a licensed architect, registered engineer, or licensed general contractor.
Under this approach, the early phases of the project (earthwork, site utilities, and foundations) can be placed under contract before design of the building shell and interior is 100 percent complete, and the structural steel and other long lead-time components can be ordered.
Then, the contracts for the early phases can be awarded to follow-on contractors.
There are two types of construction managers.
An agency CM is a consultant to the owner; an agency CM is not in the chain of privity between The owner and the contractor(s) and does not guarantee the cost of the work.
An at-risk CM, on the other hand, essentially is a brokering general contractor.
The at-risk CM is either in the chain of privity between the owner and the trade contractors or Guarantees that the aggregate price of the contracts will not exceed some maximum figure.
Any individual or firm proposing to provide construction project management services shall provide Evidence that the individual or firm and its personnel carrying out onsite responsibilities have Expertise and experience in construction project design review and evaluation, construction Mobilization and supervision, bid evaluation, project scheduling, cost-benefit analysis, claims Review and negotiation, and general management and administration of a construction project.
Which type of contract is better for design-build?
Most suitable type of contracts is lump sum contract because the owner has essentially assigned all the risks to the contractor, who in turn can be expected to ask for a higher markup in order to take Care of unforeseen contingencies.
Beside the fixed lump sum price, other commitments are often made by the contractor in the form of submittals such as a specific schedule, the management reporting system or a quality control Program.
If the actual cost of the project is underestimated, the underestimated cost will reduce the Contractor s profit by that amount. An overestimate has an opposite effect, but may reduce the Chance of being a low bidder for the project.
The scope of work, the price, the time of performance is already defined.
Usually the contractors include allowance for contingencies in their bid price so the price
Small and medium projects are most suitable for this kind of project where is the design is easy not Complicated and can be managed by one party.
The potential advantages of design-build do not come without risk.
A. Less Control.
Under traditional design-bid-build, the owner has full control over the details of the plans and Specifications and does not publish them for bids until it is satisfied that they reflect its Requirements, including functional and aesthetic preferences.
With design-build, the owner gives up some of this control. i.e., advancing the level of design through the design development stage (30 percent or so) before award of the design-build contract.
Of course, by doing so the owner may give up some of the advantages of design-build.
B. Need for Earlier Requirements Definition
With design-build, the owner must lock in its requirements much earlier.
With traditional design-bid-build, if the owner is a little fuzzy on its functional or aesthetic Requirements, it can clarify them during the design phase after if sees where the designer is heading.
But with design-bid-build, post-award programmatic changes can be very expensive and disruptive.
So, if the city (country) rules are not certain what it wants, traditional design-bid-build may be the better alternative.
D. Compliance with Subcontractors
The Subletting and Subcontracting Fair Practices Act, requires that bidders list their subcontractors with their bids. This can be a problem for a design-build bidder. Without detailed design drawings, the subcontractors cannot precisely estimate costs.
But, listing a subcontractor without a firm subcontract price puts the design-build contractor at a disadvantage in subsequently pricing the subcontract work.
A listed subcontractor has the prime design-build contractor over the proverbial barrel. This is a manageable problem for a design-build contractor with many of the same type of projects in an Area, as a subcontractor can only get away with gouging the design-build entity once.
Parking garages and housing are good examples of where the design-build entities work with a group of subcontractors on a repetitive basis, and subcontractors can estimate their work on a perspace. or.pre-square.foot.basis.
Design-build contractor shall search for competitive bids for subcontracts not listed with its prime bid.
The problem with this approach is that it depends on specific legislative authorizations that do not apply to the country.
Thus, the safest approach may be to require listing of subcontractors at time of bid, even though this may result in either the subcontractors or the prime design-build entity including some contingency and mark-up.
E. Payment bonds
Generally it is required a payment bond payable by the terms of the contract.
However, when the design services and the construction are procured under a single contract, must the payment bond be in the full amount of the design-build contract or only in the amount of the Construction portion? Logically, it would seem that 100 percent of the construction portion would fulfil the intent of the statute.