Construction Contract Management 101
Construction contract management refers to the administration of forms of standard form agreements, including construction contracts, design contracts, engineering contracts and subcontracts. Such administration includes preparation of a tender bid package by the contractor/builder/sub trade or subcontractor, soliciting bids, evaluating bids, awarding contracts/subcontracts, administration during the duration of the project, resolution of issues and procedure on termination of the agreement. This aspect of construction is vitally important as it is intricately related to project performance and control costs. Research has shown that a positive relationship between project performance and contract management exists which is critical when one considers that contractual glitches are a notorious source of delay, under-budget or over-budget and often resulting in litigation. The objective of effective contract administration is to enhance the likelihood of success of the project. This is accomplished through the targeted approach such as:
Preparation of a detailed construction contract management plan outlining the tasks that ought to be undertaken as well as the parties responsible for the completion thereof;
Maintaining and documenting up to date information on the work accomplished , problems and solutions and clarifying rights and obligations in detail;
Ensuring that changes are adequately documented and that modifications/changes to the work are properly adjusted by the contractor in writing;
Executing contracts that are unequivocal and that contain clauses that will best protect the parties from the eventuality of a dispute;
Resolving disputes as quickly as possible and using the dispute resolution procedures in the contract fairly. Typically, there are several tiers of progressive stages to solve disputes. The first and perhaps most effective is mediation, then proceeding to arbitration and finally, litigation. If possible, parties should be encouraged to consider alternative dispute resolution through court-connected mediation, adjudication, or mediation-arbitration. The basic objectives of a well-developed contract administration plan include the ultimate objective of ensuring contract performance and long-term success.
Crucial Elements of Construction Contracts
The first major piece in any construction contract is a definition of the scope of work to be completed. Both parties must be willing to come to an agreement about what the project will include before it is begun. Any estimation about the time, cost and other details that the contract projects will be in large part based on the outlined scope of work, so it is imperative that this section be detailed and precise.
Another primary component of any contract is the pricing of the work. There are multiple ways a contractor and client can agree to price a project. The three most common methods include:
• Fixed price: A set price agreed upon by both parties at the outset.
• Time and materials: A post-performance arrangement whereby the contractor submits payroll and supply receipts and invoices for the client to pay the contractor.
• Unit pricing: A rate agreed upon beforehand, in which units of production are set at an agreed-upon price per unit, with an overall total only being agreed upon after the project’s completion.
In conjunction with pricing is an estimated timeline of the project. After a scope of work is made, the contractor submits an agreement that outlines how the project will be completed and its approximate duration. Once these are approved, a contract is drafted that includes the estimated costs and timeline.
The last major component of a construction contract is the plan for risk management. All construction work carries with it the possibility of accidents and injuries, which is why it is important for both clients and contractors to agree upon a process to manage the necessary insurance claim processes in a way that is fair to both. Putting these systems in writing in the contract outlines all procedures, requirements and expectations up front.
The Contract Management Process
The contract management process is not a linear sequence of events that should be followed as a checklist. To be effective, construction contract management needs to be ongoing and adaptive to changes in the project, the contractor, and the owner. However, this does not mean that every stage of contract management must happen simultaneously. While having the design team and the owner on board early can be a good thing, if the GC or CM does not understand the design, the pre-construction phase may be stalled unintentionally while the design is finalized. There are many events that occur simultaneously and there is no hard and fast rule for how to sequence these events. It all depends on the type of project and the parties involved.
The first stage is the pre-construction or design phase. In the case of GMP contracts, the procurement of the GMP will not necessarily be the end of the pre-construction phase. The duration of the pre-construction phase will be determined by the duration of time it takes to execute the GMP and the ultimate goal when entering into a GMP agreement.
The second stage is the execution of the GMP. As mentioned above, the length of this stage will be determined by how long it takes to finalize the GMP scope and price.
The third stage is the construction and closeout phases. Although the project may be completed (or "closed out") in the sense that the work is complete, the handover and post-construction review stages often occur months later, as the work is being received by the owner and unused materials are being sold off.
Typical Issues and Solutions
Despite your best efforts, issues will arise in the management of your construction contract. Sometimes, it’s in a subcontractor’s or vendor’s interest to take their time and do too little work. Or you may end up with scope creep when a buyer or developer changes requirements or specs and you’re forced to load more costs onto future contract payments. It adds up to disputes that need to be handled in a manner that protects your interests but also balances the desire to get the job done and avoid costly litigation.
Subcontractor or Vendor Delays and Nonperformance
Construction papers and contracts are incredibly detailed, usually outlining exactly what is expected from each party. When the person you engage fails to meet one of these obligations, you have to act quickly and properly in order to minimize your loss or maximize your benefit. You can give them a courtesy call and negotiate the resolution yourself, or you can hire an outside contractor or lawyer to step in. Each case is different, so do what seems smartest for you. But remember – getting the job done is important, but so is protecting your investment and ensuring that your subcontractor or vendor is held to the original deal.
Scope Creep
Many construction projects can be subject to scope creep, which is when the buyer or developer requests changes to the project after execution of the deal, thereby adding expenses and potentially time to the project. A general provision of your contract that addresses additional work, or payment of additional work, or a process for requesting additional work, will help minimize scope creep. Otherwise, you’ll be dealing with it constantly.
Disputes
There are bound to be disputes in a long-term relationship like a construction project. These may involve subcontractors or vendors, engineers, architects, developers, owners, trade contractors or other parties. The best thing to do when a dispute arises is to try to work it out directly.
If the other party is being unreasonable, then you should consider mediation or arbitration. If neither option is successful in resolving the situation, then a lawsuit in a court of law might be your only recourse. Of course, if you have alternative dispute resolution clauses in your contract, you will need to comply with them before taking further actions.
The Role of Technology in Contract Management
As with most aspects of the building process, the use of technology can play a crucial role in contract management. According to an HBR article, companies that maximize their contracts across their lifecycle enjoy 5% higher return on hospitality and 9% higher EBITDA. Technology plays a major role in that process. Online contract management tools are the most practical and straightforward solution for any company looking for ways to leverage technology and web-based tools for contract management.
We’ve all seen the television show where a contractor shows up at a job site with the wrong plans. Without the use of cloud software allowing architects and builders the ability to collaborate remotely, those mistakes would be even more common than they are. Version control is one of the major sources of contract management mistakes, but it can be avoided with the use of digital files and web tools. Likewise , comprehensive contract management software will provide a single source of truth for all contract documents, making it easy to share with subcontractors, owners, vendors, and other necessary parties.
As mentioned above, digital tools allow different teams to work on providing a final build without a zinked version of a contract or design plan. Furthermore, a web-accessible file can be easily shared with relevant parties and can be quickly copied in order to create a record of completion for a contract. Websites such as Google Drive allow you to easily share documents with specific team members, rather than mailing reports and contracts back and forth (this provides a great security benefit, which we’ll touch on later). If using a less formal platform, files can be uploaded to a cloud-based storage account and then shared with collaborators or customers.
Legal and Compliance Considerations
Navigating the complex legal landscape is a crucial aspect that often distinguishes successful construction contract management from the rest. Each phase of the contract lifecycle requires an acute awareness of the legal implications associated with the contract. At the outset, legal review ensures that all provisions are compliant with local, state, and federal laws. After the contract has been signed and work has commenced, it’s not just compliance in the rearview mirror—the entire process must be adaptable to unanticipated issues that could arise, from price changes to labor shortages. When a breach of contract occurs, the first step in breach management is to consult the contract to determine whether both substantive and procedural elements of the breach have been fulfilled. Second, while denial and anger are natural human reactions, approaching the situation coolly and carefully is essential. It’s important to first analyze the injury to your operations caused by the breach. Third, proceed with caution, and remember that the goal is to remain an industry leader while protecting your company from future losses. Finally, if there is no way to resolve the matter without litigation, begin moving forward with further action. Litigation risks in construction contracts are prevalent but can be minimized through rigorous risk management. Defining the scope of work in precise terms creates a clear picture that informs and shapes each step of the process. In addition, maintaining a strict adherence to a schedule with regularly scheduled updates on critical path items and potential risks communicates to all stakeholders the importance of managing time and scope in balance. This may appear to be a negative change in policy—a shift from relationship-based to contract-based—but the truth is that the two are one in the same in construction management. Well thought out legal and contract policies are the most effective tools to nurture relationships between contractors, subcontractors, and owners. With clarity and transparency, both parties have clear expectations of the work and requirements for its fulfillment.
Best Practices in Construction Contract Management
Clients that are successful in contract negotiations invest the time to understand the advantages and disadvantages of provisions used to allocate risk and identify solutions to close the gap where the risk of loss seems to be one sided. Every successful project requires a balancing of the risk versus reward equation.
When evaluating and negotiating contract terms, the focus should be on closing the gap on the following five points.
Certainty. Contract terms should be present in the agreement so that a party is aware of his rights and obligations to the other party. Identify the specific requirements that the parties have agreed to perform and indicate that the details of those requirements will be defined later.
Differing site conditions. Differing site condition clauses can delay the project and increase costs to contract parties. It would be prudent to delete or limit the extent of the differing site condition clause in order to avoid this risk.
Termination. The parties should consult with their respective performance bond companies to verify whether there would be an impact on performance bonds and liability insurance if an agreement allows a party to terminate at will or does not establish the basis for termination.
Dispute resolution. All parties to a project want to avoid claims , costly and time consuming litigation and arbitration and maintain their working relationships. The parties should therefore clearly define the applicable law and confirm that this would include updated versions of the law and statutes.
Scope of work. The scope of work describes the contractor’s responsibilities and establishes the cost structure. All parties have an obligation to read the scope of work and confirm that it includes all the requirements to be performed under the agreement. The agreement should present a fair division of the risk of loss and be consistent with the representations made during the bidding period. This is especially important where subtrade pricing may fluctuate before the bid closing date due to inflation.