Forensic Accounting
Brand Protection
Computer Forensics
Corporate Investigation

Volume 10 - No. 1                    Download PDF

In this edition of
The Kessler Report:

Craft or Graft?  The Insidious World of Construction Fraud

Bid Rigging: Fleecing the Public from Day 1

Understanding the Need for an Independent Inspector

Q&A with Fraud Specialist Ronald Goldstock

Construction Contracts: What to Know Before You Sign

Defending Your Walls: How to Help Prevent Construction Fraud

Kessler's Corner:
What to do if You Suspect Fraud

DOWNLOAD PDF

Construction Contracts: What to Know Before You Sign

No matter if you are a government agency, a major corporation or a small, local business, planning and commencing a construction project can be an extremely trying process, and for many people, a very confusing process as well.  There are numerous crucial considerations... which contractors to use, what the design will be, how much money will be appropriated.  Of course, the majority of buyers will focus primarily on the third issue, and that's why it is so important to know what types of construction contracts exist, and how they can impact your project plans and bottom line.

While almost all construction contracts are customized for a specific project, nearly every agreement is essentially a modified version of one of several basic contract forms.  These contract types are often classified as follows:

Lump Sum, General Contracting (GC)
This is typically thought of as the traditional method of contract structure, in which a General Contractor is employed after the design process to perform construction duties.  The GC is then responsible for completing the project for a lump sum, as defined in the contract.  The owner will communicate directly with both the GC and the Architect, and while there is no direct contractual relationship between the GC and Architect, these two entities typically work in concert on each project to assure conformity in structural details.

The GC is also directly responsible for the utilization and management of subcontractors.  Subcontractors are typically transparent to the owner, and any subcontractor issues are usually resolved through the GC.  Contracts between subcontractors and the GC are also lump sum agreements.  This type of contract is meant to increase efficiency and control costs among specialty contractors, although the juggling of numerous vendors can place too great of a burden on the GC if not properly qualified.

Construction Management with Guaranteed Maximum Price (CM w/GMP)
In this type of contractual agreement, the construction manager is responsible for completing the project for a total sum that is equal to or less than a "Guaranteed Maximum Price."  Because of this particular term, this type of agreement is often said to be "at risk."  While the originally quoted contract total may be adjusted during the course of the project, CMs must take care to adhere to original contract numbers.  Extremely precise cost estimates are required for this type of construction management, and CMs need to exhibit superior knowledge of every step of the construction process.

Furthermore, the CM is directly responsible for each subcontractor, much like a general contractor, with the distinction that the original contract (which is often signed before plans or specifications are actually completed) is to be adhered to by the CM and all entities under its authority.

Agency Construction Management (ACM)
Whereas the GC or CM is often seen as a third-party entity that is contracted to complete a construction project (with the authority to manage subvendors), an Agency Construction Manager is seen as an extension of the owner, and is utilized to help the owner realize profits that would otherwise be earned by a contractor.  In addition to this financial factor, ACMs allow owners to direct specialty contractors without the hassle of dealing with a third-party.

Essentially, the ACM contracts with the owner to provide management services in the capacity of a consultant.  The ACM will manage vendors much like a GC or CM would, but without any contractual ties between them.  As a result, subcontractors (often referred to as trade contractors in ACM projects) report directly to the owner. 

Design-Build (DB)
With this type of agreement, the owner contracts directly with a design-build firm, which handles not only the task of designing the project with an architect (whether in-house or outside), but also handles the entire construction process.  As such, the owner only deals directly with one entity that will manage all aspects of the project from beginning to end, seriously reducing the administrative burden on the owner.

For owners, the simplicity of one single contract is not the only advantage.  This type of contract essentially pinpoints the responsibility of every facet of the job on one company.  In addition, the centralization of responsibilities allows those responsible for different aspects of the project to work more closely, and also allows for minimal stalling during the bidding, design and construction processes.

Whether you are planning a massive public works project or a simple building renovation, knowing which type of construction contract is best for your organization can mean the difference between a successful project and months of stress and financial difficulties.

BACK TO THE NEWSLETTER ARCHIVE       BACK TO THE KESSLER HOME PAGE

Copyright © Michael G. Kessler & Associates, Ltd. 2005. All rights reserved.