Selecting the right construction contract model for a particular project can be the difference between harmony and discord among project participants, and the difference between the financial success and failure of the project. Too often, we see litigation arise because of different expectations or understandings as to risk allocation, which is primarily a factor of contract strategy.
What does contract strategy mean? It is the selection (and perhaps customization) of the contract model or models to be employed on a particular construction project. For example:
- The Design-Bid-Build model, often described as the “traditional” model of construction, involves an owner contracting with one or more professionals for project design, followed by a competitive process to engage a general contractor, and then a separate contract between owner and general contractor.
- The Design-Build model, on the other hand, involves the owner contracting a single entity (Design-Builder) to complete design, procure the necessary services and materials, and complete construction.
- The Construction Management model involves the owner contracting a construction manager to handle construction management activities (and often procurement) on the owner’s behalf. Construction Management is further broken down into “construction manager as agent” and “construction manager at risk” contracting models.
- Integrated Project Delivery (such as CCDC 30) is an alternative contract model in which the owner contracts with other project participants (for both design and construction) in a collaborative team with shared risks and rewards.
These are several of the most common contract models, but there are numerous potential variations on each of these models. In addition to industry standard forms, there are of course infinite variations possible when owners or contractors introduce custom contracts, or unique supplemental conditions to the standard forms. In addition to the question of contract strategy as between owner and contractor, there is a similar (but usually more constrained) question of contract strategy for contractors and construction managers in their contracts with trade contractors. Whether we are talking about a prime contract or a subcontract, it is worthwhile noting that the contract pricing mechanism (i.e. stipulated price vs unit rate vs cost plus fee, etc.) is an important part of the contract model, but the question of contract strategy is much broader than just the selection of the pricing mechanism.
The allocation of responsibilities and risks varies significantly among the different contract models. For example, in a Design-Bid-Build model where the contractor is engaged on a stipulated price basis, the owner is generally contracting to obtain a completed project within the allocated time, for the agreed price. But the owner carries risks associated with accurately defining project scope and specifications, and associated with potential gaps or changes in design. With a Design-Build model, the owner carries relatively less risk associated with the definition of project scope or incomplete design, but the owner gives up a degree of certainty as to project price and schedule. Key factors which affect the selection of the right contract model include complexity of the project, the capabilities of each project participant, the owner’s objectives and priorities, project constraints (time, budget, etc.) and particular project risks.
Too often contract strategy is not given the consideration it deserves. An owner or contractor may use a form of contract recommended to them, or employed successfully on some past project, without thinking about the particular risk profile of the current project and the relative advantages of different contract models. We have seen many cases where disputes arise due to a fundamental difference of expectations, or a misunderstanding by one of the parties, regarding the contractual allocation of risks. This may result from a front-end failure to consider the suitability of the chosen contract model to the project at hand, or a simple misunderstanding of the risk allocation inherent in the chosen contract model.
There are resources available to assist owners and contractors alike with selecting the right contract model for their project. For example:
- CCDC 10 provides a good discussion of the suite of CCDC contracts and some of the key risk allocation issues under each one. This document is valuable both as a primer on the subject of contract strategy and as a guide for selecting among the alternative forms offered by CCDC.
- For a more advanced discussion of contract strategy considerations and best practices, the Construction Owners Association of Alberta has published a Contracting Strategy Best Practice, including useful tools such as a work process flow diagram for developing a project contract strategy.
Although the COAA Contracting Strategy Best Practice is targeted at owners on major industrial projects, both owners and contractors on any substantial construction project can benefit from this resource. I had the pleasure of participating in the development of this guide for a short time as a member of the COAA Contract Strategy Committee. I am thankful to the other committee members, all of them experienced contract management professionals for major construction owners and contractors, for allowing me to learn more than I was able to contribute. For better or worse, lawyers are rarely engaged in a project before the contract model has been chosen.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.