Contract Planning Essentials

Contract

Planning Essentials

t is essential that the administration and management of con- tracts results in reducing risks, maximizing cost savings, minimizing claims, and improving economic return. These results can only be achieved through effectively managing con- tract risks: developing fair contract documents, engaging in effec- tive negotiating practices, and employing outstanding communication skills.

The process of reaching a contract requires a specific se- quence of steps. In taking these steps, the project manager must make a series of choices between priorities for project objectives, degrees of risk to be assumed by the contracting parties, control over project activities, and the cost of achieving selected goals.

This process must first be fully understood by the project man- ager, then be tempered by experience, and finally be expanded into the ability to reach a contract through the exercise of negoti- ating and communicating skills.

An excellent, simple-to-use reference on contracts is ASHRAE Member’s Survival Guide—Contracts available from www.ashrae.org.

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A contract is a mutual business agreement recognized by law under which one party undertakes to do work (or provide a ser- vice) for another party for a “consideration.”

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Owner contracting arrangements would cover:

• Contract Conditions Commercial Terms & Pricing Arrange- ments

• Scope of Work (Technical)

• Project Execution Plan

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A written contract provides the document by which the risks, obligations, and relationships of all parties are clearly established, and ensures the performance of these elements in a disciplined manner. In the owner situation, the contract is the means by which the contractor can be controlled and ensures that the work and end product satisfy the owner’s requirements.

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Most projects are executed under a three-party contractual relationship:

• The owner, who establishes the form of contract and the gen- eral conditions.

• The engineer, who can have the following three roles:

— Designer—carrying out the detailed engineering work, and purchasing equipment and material on the owner’s behalf

— Arbitrator—acting as the owner’s agent in administer- ing the contract and deciding, impartially, on certain rights of the parties under the contract

— Project manager-handling design, procurement, and construction or construction management/services.

• The contractor

The normal contractual relationship among these three par- ties on a single project is for the owner to have one contract with the engineer for design, procurement, and other services, and a separate contract with the contractor for the construction work. No contractual relationship exists between the engineer and the contractor. This is usually referred to as a “divided or split responsibility” arrangement. In an alternative arrangement, called “single responsibility,” a general contractor is awarded to- tal responsibility for the engineering, procurement, and con- struction.

The project manager must carefully decide on a specific con- tracting arrangement, as outlined in the section below on Contract Strategy, and in Chapter 6, Planning.

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ESPONSIBILITY

The project manager is essentially responsible for the contract strategy, which is developed as part of the project strategy. How- ever, the proposed division of work, contracting arrangements, forms of contract, and bidders’ lists should be developed in con- junction with the company’s contracts department.

This combined responsibility of the project manager and the contracts department in the contracting process can lead to ineffi- ciencies, delays, and disagreements and can negatively impact the project cost and schedule when there are organizational conflicts.

Close coordination and effective communications must exist be- tween all groups to ensure complete agreement and commitment to the proposed contracting program. This is particularly impor- tant in all submissions to contract committees and/or senior man- agement.

The project manager must obtain agreement from the company’s contracting department and insurance department be- fore committing to contractual language regarding liability, in- demnity, or insurance.

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^TRATEGY

As covered in the project strategy, the following would be major considerations when developing a contract strategy for the project:

• When and how will the work be divided up?

• How will the division of work affect client/project team/

main contractor/vendor/subcontractor interfaces? (This divi- sion enables the project coordination procedures to be prop- erly prepared.)

• What type of contract should be used? Segment the project into discrete work packages to facilitate management, and subject the work packages to available resources. Consider the contract philosophy, the type of contract best suited to the project, contract interfaces, bid evaluation techniques, and bid documentation. This enables the contract strategy to be produced in liaison with the contracts department.

• What roles are licensers and consultants expected to play?

This allows arrangements to be made for prequalifying suit- able contractors, issuing invitations to bid, evaluating bids, and making award recommendations.

• Are there potential conflicts of interest with other owner projects in contractors’ offices, in vendors’ workshops, or within fabrication yards? Such conflicts can have an impact on the bidder’s list.

• What is the availability of skilled labor? What is the indus- trial relations climate local to fabrication yards and local to the construction site? Lack of labor can delete a contractor from the bidder ’s list.

• What is the quality and availability of personnel to develop, evaluate, and administer the required type of contract/con- tract conditions?

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RRANGEMENTS

Engineering and construction contracts can be drawn in a great variety of forms, depending on the contract strategy and the financial resources of the contractor. The most successful contracts have at least one element in common: thoughtful and thorough preparation before the contract is let.

Contractual arrangements in construction are becoming in- creasingly more involved, which leads to the potential for signifi- cant added costs. Project complexity, and the changing and increasingly costly legal and insurance environments, are major reasons for considering whether better contractual arrangements are possible. Contracts, of course, must be made early in the life of a project. To do this while simultaneously providing for the risks of uncertainties and gaining improved performance and in- novation presents major challenges for owners and contractors alike.

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There are three principle types of contracts: reimbursable, measured (unit price), and lump sum. The following forms of contract are typical of these types:

• Cost Reimbursable (Time & Material)

• Cost Reimbursable with Percentage Fee

• Cost Reimbursable with Fixed Fee

• Cost Reimbursable Plus Cost/Schedule Bonus-Penalties

• Measured Unit Price (Mostly Construction)

• Guaranteed Maximum Price

• Lump Sum/Fixed Price