USA Law and Practice Contributed by: Richard L. Rosen, Leonard S. Salis and Dennison Marzocco, Rosen Karol Salis PLLC
7. Construction 7.1 Common Structures Used to Price Construction Projects Various structures are used to price construction pro - jects. They include the following. Fixed Price General contractors may agree to complete the pro - ject for a predetermined fixed price, regardless of any additional costs or changes to the work. Construction lenders like to see fixed-price contracts as a part of the properties they are financing. Cost-Plus Under a cost-plus pricing structure, the general con - tractor is typically reimbursed for the costs of the pro - ject, plus a percentage above cost (the “plus” portion may also be a fixed fee rather than a percentage). Cost-plus pricing structures are usually utilised when the scope of the project is unclear, or if numerous project changes are anticipated. Time and Materials This structure is often used for small projects and where the amount of work is unclear. The general contractor is paid for the actual cost of labour and materials, plus an additional fee or percentage for the general contractor’s profit. Unit Price This cost structure is frequently used for projects with repetitive units of work (eg, roads or utilities), but can also be used for apartment projects or the develop - ment of a housing project of similar homes or struc - tures. The general contractor may be paid based on a square footage or “per unit” basis. Guaranteed Maximum Price Guaranteed Maximum Price (GMP) structures are typi - cally used for well-defined projects, and it provides certainty for the owner while incentivising the con - tractor to manage costs efficiently. Under this pricing structure, the general contractor agrees to be reim - bursed for the actual cost of the project, plus the gen - eral contractor’s profit, up to a maximum “capped” price. GMP contracts often include a savings-sharing provision, whereby any costs saved below the capped
price are split between the owner and contractor, fur - ther aligning both parties’ interests in managing costs efficiently. 7.2 Assigning Responsibility for the Design and Construction of a Project Responsibility for design and construction of a project can be handled in a variety of ways, but the following methods are most common. Design-Bid-Build This is the traditional method of construction where the owner hires an architect or engineer to design the project. General contractors then bid on the project. The lowest bidder typically gets the assignment and is responsible for completing the project according to the plans. Other factors, such as the general contrac - tor’s reputation (good or bad) may, however, play a part in the selection process. Design-Build This is when the owner hires a single design and con - struction firm to complete the project. A key benefit of this method is that it can reduce costs and accel - erate the work schedule by overlapping the design and construction phases, rather than completing them sequentially. Construction Manager at Risk This is a project delivery method where a construc - tion manager oversees the project from start to fin - ish and takes on a significant portion of the project’s risk by providing a guaranteed maximum price. The construction manager is involved early in the project and is responsible for providing input and feedback during the design phase – such as cost estimating and constructability reviews – while the architect or engi - neer leads the design phase. After the design phase is completed, the construction manager steps into the role of a general contractor and completes the project. Integrated Project Delivery The Integrated Project Delivery (IPD) approach is used in highly complex projects in which the owner, archi - tect, general contractor and other parties work collab - oratively to develop the design and construction plan. What distinguishes IPD from the other methods is the challenge of co-ordinating multiple parties under a
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