What Are the Different Contract Variables?
Hard Dollar with Variables
Hard dollar Contracts/tenders are if theory fully documented and when a builder tender these types of building with all the docs presented – It becomes a race to the lowest price. But the documents are never fully documented and a builder will have clarifications and exclusions.
The big difference between a hard dollar tender is this:
- With a hard dollar tender – you only price what is on the drawings and doesn’t where any risk associated with items missing of drawings and any buildability issues. (Anything missed will a variation later).
- A D&C builder will then take those same drawings and price in all the build-ability issues and generally, everything missed of the documents and wears all the risk everything not excluding or clarified.
Often builders will receive tenders at the varying stages of design and documentation. Hard dollar / Lump Sum contracts can still use if a project if it hasn’t been fully designed. The builder split all the known costs and address the unknown costs using a few methods including:
- Hard Dollar with Provisional Sums / PC Items
- D&C Hard Dollar – Principle Design Brief tender including all design and Building.
- Negotiated Tender – Still a Hard Dollar with all the variable costs negotiated a risk register.
- Split Hard Dollar / D&C Contract – Hybrid of both contracts.
Hard Dollar with a D&C Component Contract – As it sounds this is a contract may have a Lump sum price on the majority of the work with a smaller portion that needs a redesign or an additional stage. This can be addressed via a split Hard dollar contract with a D&C component or you can use a “Provisional sum or PC Items” to address these variable unknown costs. (Using this system means the Builder has no risk and the Client holds all the risk).
I have always struggled with the concept of a Lump sump contract having variable costs?
Only saying…
Hard Dollar Contract (including D&C Content) – A tender can basically be D&C in natural however the actual Contract is still Hard dollar. The builder will manage the design consultants, mitigate approvals, and finally build a project to a clients design brief. A good example of this type of contract is The Government GC21.
This contract addresses the scope as a minimum performance however leaving “the how?” up to the builder. The bad part of the GC21 is anything that has been notified to the tendering builder must be priced even if obscure. The contract asks the builder to take all risk associated with Latent conditions (hidden stuff) – however, this can normally be negotiated out of the contract conditions.
Negotiated Tender – This can sometimes happen as a Lump sum tender and then the builder will either then negotiate a price for additional works and absorb into a lump sum price effectively absorbing all the risk.
Another way to address the clients risk is to price a Risk Register. The client and builder then agree who is going to wear the risk. The agreed items are then included in the lump sum and the builder holds the risk on these absorbed items. Obviously, the client holds the risk of any excluded items is addressed as a variation under the contract.
Design & Construct (D&C) Contracts
As noted above – D&C Builder can price from a number of locations within the Design Phase but normally from after the DA has been approved, however, this can vary with clients, Especially so if you have a pre-existing business relationship.
Refer to The Design Phase below – Note a D&C could ask to tender from Process 1 to after 4.
So we have established a D&C builder will manage the design consultants, mitigate approvals, and finally build a project to a clients design brief. The “Principle Design Brief” is a performance document highlighting the client’s needs, or design Intent. So when you have a reasonable amount of time you then go about constructing a price considering all the variables within the clients brief and site-specific requirements.
Now, what if the client hasn’t the time for a formal D&C tender. In this situation, a client may have enlisted the services of a Quantity surveyor to produce a cost Plan.
The client can proceed a few ways but could ask for a few builders to submit a cost plan to ratify the Quantity Surveyors numbers. The cost Plan would be submitted in a set manner to compare “Apples for Apples” from builders. The builder would quote on all set costs including Preliminaries, Overheads, and margin. The consultant fee, authority fees, and trade cost would be variable. basically a “do and charge or Cost Plus” contract.
All the variable cost would have an agreed margin across all trades. (with a minimum margin capped).
Construction Management (CM) contract
- Preliminary costs – Quoted
- Overheads and insurances – Quoted
- Consultant costs – Estimated
- Authority Costs and Inspection Fees – Estimated
- Trade costs – Estimated
- Margin – % Quoted
CM Contract with Guaranteed Maximum Price (GMP)
The client may then choose to ask the builder to price a risk register and adjust the trade costs adjusted to reflect a worst-case scenario. Now if the client says I will accept that price as a maximum price if you as a builder can take on all the risk. This contract would be GMT.
- Preliminary costs – Quoted + Risk = GMP
- Overheads and insurances – Quoted + Risk = GMP
- Consultant costs – Estimated + Risk = Quoted GMP
- Authority Costs and Inspection Fees – Estimated + Risk = Quoted GMP
- Trade costs – Estimated + Risk = Quoted GMP
- Margin – Quoted
The trick to the GMP is based on the drawings at the time of tender with an agreed Client brief. If the client changes brief or adds items to the scope this would still be a variation over and above the GMP.
CM Contract with Profit Share
As per the GMP listed above, the client may then choose to ask the builder to share the risk and as an inventive, to each, both builders and clients may enter into an agreement where that share any profits and losses in the trade estimate normally at 50%. The fair way is to share both losses and wins, however most clients will only share the wins. (this is one of the reasons I am not a fan of this type of deal.
- Preliminary costs – Quoted
- Overheads and insurances – Quoted
- Consultant costs – Estimated + riskless 50% Profit Share
- Authority Costs and Inspection Fees – Estimated + risk less 50% Profit Share
- Trade costs – Estimated + risk less 50% Profit Share
- Margin – Quoted
Again the trick to the CM with the Profit share contract is based on the drawings at the time of tender with an agreed Client brief. If the client changes brief or adds items to the scope this would still be a variation over and above the Agreement.
If you wish to read more about
Tender Process – Click Here
Why do we need a Contract? – Click Here