Construction Methods - Chapter18.pdf - po ang - Januszek66

ContractConstruction

18–1INTRODUCTION

TheConstructionProcess

Theseveralorganizationalandmanagementmethodsbywhichconstructionmaybe

accomplishedweredescribedinChapter1.Constructionbyageneralcontractoremployed

underaprimeconstructioncontractisonlyoneofthesemethods.However,sincethis

methodofobtainingconstructionservicesiswidelyused,itwillformthebasisforthis

chapter’sdiscussionofcontractconstruction,includingbiddingandcontractaward,con-

structioncontracts,plansandspecifications,andcontractadministration.

ConstructionContractLaw

Constructionprofessionalsarenotusuallylawyersandthereforeshouldnotattempttoactastheir

ownlawyers.However,constructionprofessionalsmusthaveathoroughunderstandingofthe

customarypracticesandunderlyinglegalprinciplesinvolvingcontractconstruction.Virtually

everyactiontakenbyacontractor,constructionmanager,orarchitect/engineerataconstruction

sitehaslegalimplications.Thereissimplynottimetoconsultalawyereverytimeadecisionmust

bemade.Thusconstructionprofessionalsmustunderstandthecontractualconsequencesoftheir

activitiesandbeabletorecognizewhenlegaladviceshouldbesecured.Hencethepurposeofthe

discussionofcontractlawinthischapteristofamiliarizethereaderwiththegeneralprinciplesof

constructioncontractlawandpracticeandtoprovideabasisforfurtherstudy.Astudyofthe

summariesofcourtdecisionspertainingtoconstructioncontractdisputesfoundinmanyprofes-

sionalmagazineswillalsobeveryhelpfulinacquiringfurtherknowledgeinthisarea.

18–2BIDDINGANDCONTRACTAWARD

BidPreparation

IntheUnitedStates,asinmuchoftheworld,constructioncontractingisahighlycompetitive

business.Toprosperandgrow,aconstructioncompanymustachieveareputationforquality

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workmanshipandtimelycompletionwhileachievingareasonablereturnonitscapital

investment.Thusprofitisanobviousandprincipalmotiveforbiddingonaconstruction

contract.However,thereareanumberofotherreasonswhyacontractormaychoosetobidon

aproject.Duringtimesoflowconstructionactivity,contractorsmaysubmitbidswithlittleor

noprofitmargininordertokeeptheirequipmentinoperationandpreventthelossofskilled

workersandmanagers.Althoughsuchapolicymaybesuccessfulonashort-termbasis,itis

apparentthatitwillleadtofinancialdisasteriflongcontinued.Otherreasonsforbiddingona

projectincludeadesireforprestigeandthemaintenanceofgoodwillwithregularclients.

Projectsthatreceivewidepublicitybecauseoftheirnationalimportanceortheirunusualnature

areoftenbidatlowprofitmarginsfortheprestigetheyconferonthebuilder.Inthesecases,

thelossofpotentialprofitcanbejustifiedbythepublicrecognitiongained.Likewise,con-

tractorssometimesbidonrelativelyundesirableprojectsinordertomaintainarelationship

withanowner.Insuchcases,theprofitmarginusedforthebidwouldbeexpectedtobehigh.

Regardlessofmotivation,acontractorwhohasdecidedtobidonaprojectmustthenpre-

pareadetailedcostestimatefortheexecutionoftheproject.Thefirststepinpreparationofa

costestimateistotakeoff(orextract)thequantitiesofmaterialrequiredbytheplansandspec-

ifications.Thesequantitiesarethenextended(ormultipliedbyunitcostestimates)toprovide

atotalestimatedmaterialcostfortheproject.Similarestimatesaremadeforlabor,equipment,

andsubcontractcosts.Thecostsofequipment,labor,andmaterialareoftenreferredtoas direct

costs. Next,estimatesaremadeoftheadministrativeandmanagementexpensesthatwillbe

incurredattheprojectsite.Thesecostsareoftenreferredtoasjoboverheador indirectcosts.

Afterallprojectcostshavebeenestimated,itisnecessarytoaddanadditionalamount

(ormarkup)forgeneraloverheadandprofit. Generaloverhead mustcoverthecostofallcom-

panyactivitiesnotdirectlyassociatedwithindividualconstructionprojects.Majoritemsof

generaloverheadincludesalariesofheadquarterspersonnel(companyofficials,estimators,

clerks,accountants,etc.),rentandutilities,advertising,insurance,officesupplies,andinter-

estonborrowedcapital.Theusualprocedureforproratinggeneraloverheadexpensestoproj-

ectsistoestimatetotalannualoverheadexpense,dividebytheexpecteddollarvolumeof

constructionworkfortheyear,andthenmultiplybytheprojectbidprice.Theamounttobe

addedfor profits is,ofcourse,amanagementdecision.Althoughsomeprojectsmaybebid

withlowprofitmarginsforthereasonsdiscussedearlierinthissection,inthelongrun,con-

structionoperationsmustyieldareasonablereturnoninvestedcapital.Unlessthereturnon

capitalisgreaterthantheyieldofstandardcommercialinvestments,theownerwouldbebet-

teroffinvestinginsuchitemsthaninoperatingaconstructionbusiness.

Biddingstrategy,ortheselectionofaspecificbidpriceforafixed-priceconstruction

contract,isamixtureofartandsciencethatisbeyondthescopeofthisbook.Methodsused

rangefromstatisticalanalysesandapplicationofgametheorytoseat-of-the-pantsdeci-

sions.Thebidpriceactuallysubmittedbyacontractorisusuallybasedonananalysisof

theexpectedcompetitionandthestateoftheconstructionmarketinadditiontothecon-

tractor’sestimateofthecosttoexecutethatproject.

BiddingProcedure

Theprincipalstepsinthebiddingprocedureforafixed-priceconstructioncontractinclude

solicitation,bidpreparation,bidsubmission,bidopening,selectionofthelowestqualified

bid,andcontractaward.Solicitationmayrangefromaninvitationsenttoaselectedfew

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contractorstopublicadvertisement.Exceptinspecialcircumstances,U.S.governmental

agenciesarerequiredtosolicitbidsbypublicadvertising.Toensureadequatecompetition,

atleastthreebidsshouldbeobtained.

Contractorsindicatinganinterestinbiddingshouldbesuppliedwithatleastone

completesetofcontractdocuments.Adepositmayberequiredtoensurethereturnof

projectplansandspecificationsfurnishedtounsuccessfulbidders.Thetimeallowedforbid

preparationshouldbebasedonthesizeandcomplexityoftheproject.Threeweekshas

beensuggestedasareasonableminimumtime.

TheAssociatedGeneralContractorsofAmerica,incooperationwithotherprofes-

sionalorganizations,hasdevelopedrecommendedbiddingproceduresforbothbuilding

constructionandengineeredconstructionwhicharedesignedtoensurefairnesstoboth

contractorsandowners(references6and8).Amongtheserecommendationsaretheuseof

standardbidproposalforms,specifyingtheorderofselectionofalternates,andsuggested

minimumtimestobeallowedforbidpreparation.Alternatesareoptionalitemsbeyondthe

basicprojectscope.Sincealternatesmayormaynotbeselectedbytheowner,theirorder

ofselectionwillaffectthedeterminationofthelowestbidprice.

Bidopeningsarefrequentlyopentothepublic,andinsuchcasesbidpricesare

announcedasthebidsareopened.Tofacilitatecommunicationsbetweencontractorsand

subcontractorsimmediatelypriortobidsubmission,thedeadlineforsubmissionofbids

shouldnotoccuronaholidayorthedayimmediatelyfollowingaholiday.

ContractAward

Afterthebidsareopened,theyareevaluatedbytheownertodeterminethelowestqualified

bid.The qualification ofacontractoristhedeterminationthatthecontractorpossessesboththe

technicalandfinancialabilitytoperformtheworkrequiredbythecontract.Themethodof

qualificationusedwilldependontheownerinvolved.U.S.governmentregulationsrequirethe

contractingofficer (personempoweredtoexecutecontractsbindingthegovernment)tomake

aformalfindingthatacontractorisqualifiedtoperformbeforeacontractmaybeawarded.

Anothermethodofbidderqualificationiscalled prequalification. Underthisproce-

dureonlythosecontractorsdeterminedtobecapableofperformingareinvitedtosubmit

bidsfortheproject.Amorecommon,althoughindirect,methodofprequalificationisto

requirebondingofthecontractor.Bondsusedinconstructionincludebidbonds,perform-

ancebonds,andpaymentbonds.A bidbond guaranteesthatacontractorwillprovidethe

requiredperformanceandpaymentbondsifawardedthecontract.A performancebond

guaranteescompletionoftheprojectasdescribedinthecontractdocuments.A payment

bond guaranteesthepaymentofsubcontractors,laborers,andsuppliersbythecontractor.

Afteridentifyingofthelowestresponsible(i.e.,onefromaqualifiedbidder)andrespon-

sive(i.e.,complyingwithbidrequirements)bid,thewinningbidderisnotifiedbyaletter

ofacceptanceornoticeofaward.Thisdocumentbringsintoforcetheactualconstruction

contractbetweentheownerandthecontractor.

Subcontracts

Subcontracts arecontractsbetweenaprimecontractorandsecondarycontractorsor

suppliers.Subcontractsarewidelyusedinbuildingconstructionfortheinstallationof

electrical,plumbing,andheatingandventilatingsystems.Thecontractualarrangements

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betweentheprimecontractorandthesubcontractorsaresimilartothosebetweentheowner

andtheprimecontractor.However,subcontractorsareresponsibleonlytotheprime

contractor(nottotheowner)intheperformanceoftheirsubcontracts.Subcontractsare

includedinthissectiononlyforthepurposeofrelatingthemtothebiddingprocess.

Sincesubcontractcostsoftenmakeupamajorportionofthecostforaproject,itis

essentialthattheprimecontractorobtaintimelyandcompetitivepricesforsubcontract

services.Infairness,thesuccessfulprimecontractorshouldexecutecontractswiththose

subcontractorswhosepriceshavebeenusedforpreparationofthebid.However,afterre-

ceivingthecontractaward,somecontractorsattempttoobtainlowersubcontractpricesby

negotiatingwithothersubcontractors.Thispracticeisreferredtoas bidshopping andis

widelyconsideredanunethicalpracticewhichleadstopoorsubcontractorperformance.As

aresult,biddingproceduresoftenrequirethebiddertoidentifysubcontractorsatthetime

ofbiddingandtouseonlythesesubcontractorsontheproject.Somegovernmentalagen-

ciesevengosofarastoawardseparateprimecontractsforgeneralconstructionandfor

eachareaofspecialtywork.Whileprotectingthesubcontractors,suchaproceduregreatly

complicatesprojectcontrolandcoordination.

18–3CONSTRUCTIONCONTRACTS

ContractElements

Thelegallyessentialelementsofaconstructioncontractincludeanoffer,anacceptance,

andaconsideration(paymentforservicestobeprovided).Theofferisnormallyabidor

proposalsubmittedbyacontractortobuildacertainfacilityaccordingtotheplans,speci-

fications,andconditionssetforthbytheowner.Acceptancetakestheformofanoticeof

award,asstatedearlier.Considerationusuallytakestheformofcashpayment,butitmay

legallybeanythingofvalue.

ContractTypes

Contractsmaybeclassifiedinseveralways.Twoprincipalmethodsofclassificationareby

methodofawardandbymethodofpricing.Thetypesofcontractby methodofaward arefor-

mallyadvertisedcontractsandnegotiatedcontracts.Theprocedureforthesolicitationand

awardofanadvertisedconstructioncontractwasdescribedintheprevioussection. A

negotiatedcontract ,asthenameimplies,isonenegotiatedbetweenanownerandacon-

structionfirm.Alltermsandconditionsofthefinalcontractarethosemutuallyagreedtoby

thetwoparties.Whilefederalprocurementregulationsestablishformallyadvertisedcompet-

itivebiddingasthenormalprocess,negotiatedcontractsarepermittedunderspecialcircum-

stances.Privateownersmay,ofcourse,awardacontractinwhatevermannertheychoose.

Thetwotypesofcontractbymethodofpricingare fixed-pricecontracts and cost-type

contracts. Eachofthesetypeshasanumberofvariations.Therearetwoprincipalformsof

fixed-pricecontracts:firmfixed-pricecontractsandfixedpricewithescalationcontracts.

Otherclassificationsoffixed-pricecontractsinclude lump-sumcontracts and unit-price

contracts. A lump-sumcontract providesaspecifiedpaymentforcompletionofthework

describedinthecontractdocuments.Unit-pricecontractsspecifytheamounttobepaidfor

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eachunitofworkbutnotthetotalcontractamount.Suchcontractsareusedwhenthe

quantitiesofworkcannotbeaccuratelyestimatedinadvance.Theprincipaldisadvantages

ofunit-pricecontractsaretherequirementforaccuratelymeasuringtheworkactuallyper-

formedandthefactthattheprecisecontractcostisnotknownuntiltheprojectiscompleted.

Acombinationoflump-sumandunit-priceprovisionsmaybeusedinasinglecontract.

Fixedpricewithescalationcontractscontainaprovisionwherebythecontractvalue

isadjustedaccordingtoaspecifiedpriceindex.Suchcontractsreducetherisktothecon-

tractorduringperiodsofrapidinflation.Sincethealternativeduringperiodsofinflationis

forthecontractortoaddalargecontingencyamountforprotection,theuseofanescalation

clausemaywellresultinalowercosttotheownerthanwouldafirmfixed-pricecontract.

Inspiteofthis,fixed-priceconstructioncontractswithescalationclauseshavenotbeen

widelyusedintheUnitedStates.

Cost-type(orcost-plus)contractsareavailableinanumberofforms.Someofthese

include:

•Costpluspercentageofcost.

•Costplusfixedfee.

•Costplusfixedfeewithguaranteedmaximumcost.

•Costplusincentivefee.

A costplusapercentageofcostcontract paysthecontractorafeethatisapercentageofthe

project’sactualcost.ThistypeofcontractmaynotbeusedbyU.S.governmentagenciesbe-

causeitprovidesanegativeincentiveforthecontractortoreduceprojectcost.Thatis,the

highertheprojectcost,thegreaterthecontractor’sfee.Themostwidelyusedformofcost

reimbursementcontract,the costplusfixedfeecontract ,doesnotrewardthecontractorfor

anincreasedprojectcostbutstillfailstoprovideanyincentivetominimizecost.The cost

plusfixedfeewithguaranteedmaximumcostcontract addssomeoftheriskofafixed-price

contracttothecostreimbursementcontractbecausethecontractorguaranteesthatthetotal

contractpricewillnotexceedthespecifiedamount.Henceitistobeexpectedthatthecon-

tractor’sfeeforthistypeofcontractwillbeincreasedtocompensatefortheaddedriskin-

volved.The costplusincentivefeecontract isdesignedtoprovideanincentiveforreducing

projectcost.Inthistypeofcontract,thecontractor’snominalortargetfeeisadjustedupward

ordownwardinaspecifiedmanneraccordingtothefinalprojectcost.Thusthecontractor

isrewardedbyanincreasedfeeifabletocompletetheprojectatacostlowerthantheorig-

inalestimate.Allcost-typecontractsshouldclearlydefinetheitemsofcostforwhichthe

contractorwillbereimbursedandspecifythebasisfordeterminingtheacceptabilityofcosts.

ContractDocuments

Aconstructioncontractconsistsofthefollowingdocuments:

•Agreement.

•ConditionsoftheContract(usuallyGeneralConditionsandSpecialConditions).

•Plans.

•Specifications.

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