There are several types of construction contracts. How best to choose?
We know the most common ones:
- The fixed rate or package contract
- The cost-plus percentage or fixed rate contract
- The cost-plus contract with a maximum guarantee
Added to these are:
- The “turnkey” contract
- The “design built” contract
- The building management contract
- And there are more.
Each of these contract formulas have their advantages and downfalls. In order to make the right choice and gain the most out of it with the least amount of inconveniences, one must first understand what’s at stake in a project and properly evaluate the potential risks. A connection needs to be made between the type of contract and the level and nature of risks involved.
Normally, the more a project is simple, well-defined with complete building documentation and fairly doable within the available timeframe, the more the landlord can benefit of the fixed rate or package contract. The landlord can then, by placing in competition a few pre-qualified contractors known for their quality, trustworthiness and solvency, be sure to obtain the best price for his project. In opposition, when a project is complex or in the process of being developed, when high-quality is required or when construction work must begin before the full scope of the work is known, or if the construction documentation is not yet complete, the cost-plus contract is the best option here. This is where the fixed price contract is bound to place the landlord at a disadvantage.
Other types of contracts are useful in particular situations:
Cost-plus contract with a maximum guarantee
This formula enables landlords, based on a reasonable budget, to share achievable savings up to a maximum amount and without having to cover excess costs. This contract is particularly useful when high standards are required and the budget cannot go over.
This one works rather well when the client needs are well defined and details are not important. In this case, the contractor provides the site, design and construction. The contractor also takes care of permit costs and building financing, all at a fixed price.
Design built contract
In this contract, responsibilities are divvied up almost like the turnkey contract, except that the contractor adds on the architect’s service fees and does not provide financing.
Building management contract
Finally, this contract is one in which the contractor is involved in the pre-construction phase, advising the landlord on the feasibility of the project, construction budgets and schedule without assuming the responsibility of these segments. We then conduct call for tenders for specialized contractors and suppliers. The contractor helps the landlord assess and grant sub-contracts, overseeing the coordination of the work and supervision until the delivery of the final project. The onus is on the landlord when it comes to any risk of cost overrun.
A hybrid formula is more and more used, particularly when the building management contract is coupled with a commitment to convert the contract into a package contract once the project is defined enough to enable the granting of contracts to specialized contractors. This formula allows the adding on of the contractors’ expertise as soon as the project begins all the while making sure the best prices are obtained with the fixed rate contract with different specialised contractors. It also allows the landlord to intervene in the choosing of players, such as certain suppliers capable of satisfying very specific aspects of the project.
The key players in the construction industry, namely landlords from the private and public sectors, architects, designers, engineers and lawyers have conjured up standardized contracts for most of these types of contracts. These were made up in part by the Canadian Committee of Construction Documents (CCDC). These forms are the fruit of a process based on consensus and aim to find balance between all stakeholders in a construction project. They are mostly distributed by the Canadian Construction Association and its association members from each province.
Unfortunately, a trend has appeared in the past few years now where a number of clients, some of which are major players, have been making changes to these standard documents to ensure more power over stakeholders. This creates inconsistencies where contract provisions differ from one project to the next. There are so many of these discrepancies that they are most often a source of confusion for both parties.
It’s best to favor contractual practices where changes to standard formulas allow for very specific and justified modifications pertaining to a given project’s particularities or participants.
To sum it up, a construction contract is first and foremost a service contract that must be selected primarily according to the risks each contracting party exposes themselves to and the elements each stakeholder stands to gain. A proper evaluation of requirements and risks is necessary before choosing a construction contract type that preferably remains as much as possible faithful to its standard version.