A construction management contract is a legally binding agreement between the project owner (referred to as principal) and the commercial building contractors where the manager is charged with the responsibility of engaging with the sub-contractors and supervising the construction while providing the owner with a warranty as to the quality of the work.
Certain construction management contracts involve a third party—Client’s Representative. The CR is appointed by the owner to deal with matters like an extension of time claims and inspection of the site. In most cases, the CR is a qualified architect.
Who Should Engage The Sub-contractors?
There are two options for engaging sub-contractors in the project depending on the nature of the Construction management contract.
The first option is where the owner signs individual trade contracts with the sub-contractors. In this instance, the principal will handle all payments to the sub-contractor for the work done.
The second option is for the manager to enter into individual contracts with the various sub-contractors.
In this case, all payments to the sub-contractors will fall under the construction manager who will then add the amount to the payment claims he/she makes to the owner.
Types Of Construction Contracts
There are four major types of construction contracts. These specific types of contracts are determined by how the owner makes disbursements to the contractor.
Other particular details may include quality, duration, specifications, the scope of the work and penalty for delays.
These major contract types can also be customized to meet the specific needs of a particular project.
1. Lump Sum Contract
In a lump sum contract, the owner and the contractor agree on a total fixed price for the entire project.
The contractor agrees to complete the work for that fixed amount regardless of whether the construction exceeds or is lower than the agreed price.
The contractor is usually taking in more risk with this type of contract since problems will always arise leading to higher commercial construction cost per square foot.
2. Cost Plus Contract
Cost plus contracts require the owner to pay for all purchases, construction costs and other expenses throughout the construction. In this case, the owner takes the risk.
These type of contracts come in many variations including Cost Plus Fixed Percentage, Cost Plus Fixed Fee, cost plus with guaranteed maximum price and bonus contract and cost plus with guaranteed maximum price contract.
3. Unit Price Contracts
The contractor sets a specific price for a particular task. The owner is required to pay for the number of units provided at that unit price.
Both the owner and contractor assume some level of risk. The owner can ascertain that they are being charged reasonably and the contractor need not worry about inaccurate estimations.
4. Time and Material Contracts
The owner takes most of the risk by agreeing to pay for the time and materials spent on the construction.
The parties agree on an hourly or daily rate and any other additional expenses. Sometimes a maximum price clause is included to protect the owner.
Things to consider before signing a construction management contract
The agreement should have specified time frames. Sometimes the project may go off schedule, and the owner needs to protect themselves against such an occurrence.
The contract should contain details of when the construction will commence, the schedule that the contractor will follow and when the project will end.
However, an extension may be granted in cases where delays are caused by:
- Poor weather
- Labor strike
- Delayed payments by the owner
- Inspection delays
- Changes made after both parties agree
- Any other issues that are beyond the control of the contractor
The contract should include all the relevant costs and charges. Parties should be wary of extra charges that may not have been part of the initial agreement.
For example, a quoted hourly rate may fail to include additional charges for things such as postage and photocopying.
7. Method of Payment
In most cases, the contractor will rely on the payments they receive from the owner to fund the project.
Therefore, the contract should stipulate when and how the contractor will receive their payment to facilitate a steady flow of cash so that they can complete the project on time.
A typical contract will require the owner to make an initial payment before construction commences.
The contractor will, thereafter, be expected to submit an application on a regular basis after indicating the amount of work done during the cycle.
8. Payment Penalties
The contract should indicate whether there are penalties for late payments. If there are any penalties, they must be reasonable or else the courts may fail to recognize them should disputes arise later on.
9. Inability to Agree
If you can’t seem to agree on specific terms but need to start the work immediately, ensure that any agreement you sign cannot be enforced as a permanent agreement.
You can sign an interim agreement which will only be in operation until both parties can agree on a permanent one.
10. Resolution of Disputes
No matter how good your relationship is or how careful you are, conflicts are bound to arise. Most contracts usually include an arbitration clause.
The clause means that any disputes that arise must be solved through arbitration rather than in a court of law. Consequently, signing such a contract means that you waive your right to go to court.
Though not always, most contracts will include a warranty clause that describes the type of defects the contractor is liable for, the owner’s maintenance obligation, the length of the warranty period and how the contractor should fix the flaws.
Some contracts will also contain limits or waivers on warranties.
12. Attorney Fees
Both parties should agree who should take care of the attorney fees in case they take a dispute to court. In some states, the winner may not recover attorney fees unless there was a specific provision in the contract that provided for this.
Construction contracts usually involve a great deal of money and risk. Before agreeing to sign on a contract, both parties should ensure that it is the right type and that it protects their interests. They should do their research before making the final decision since there is no going back.