Concepts
Candidates must be proficient at advising senior stakeholders on selecting the appropriate delivery method and contract structure to satisfy the needs of a given project. This core competency is dependent on understanding project goals, stakeholder objectives, project risks, and other critical factors that influence the choice of delivery method and contract structure.
I. Understanding Delivery Methods
Project delivery methods define the contractual relationships and roles for project stakeholders such as the owner, the designer, and the contractor. The choice of delivery method significantly affects a project’s timeline, cost, quality, and risk distribution. Key delivery methods include:
- Design-Bid-Build (DBB): Considered traditional or conventional, under this method, the owner contracts separately with the designer and the contractor. The designer is responsible for the design phase, while the contractor undertakes the construction phase. This method is straightforward but may lead to disputes between the designer and the contractor.
- Design-Build (DB): This method streamlines the design and construction phases under a single contract. While it can reduce delivery time and expenses, it also places a significant amount of risk on the designer/contractor team. Owners must have a well-defined project scope before entering into a DB contract.
- Construction Management at Risk (CMR): Under CMR, the construction management firm becomes the general contractor during the construction phase, assuming the risk for construction performance. The owner benefits from professional construction expertise throughout the project but may face contractual challenges.
II. Deciding on Contract Structures
Project contract structures govern the agreed terms and conditions of payment between the owner and the contractor. Contract structures balance cost certainty and contractor risk. The most common include:
- Fixed-Price or Lump-Sum: The contractor agrees to provide specified work for a preset price irrespective of actual costs. While owners prefer this for cost certainty, contractors face high risk.
- Cost Plus: The owner agrees to pay actual costs, overheads, and profit. Cost-plus contracts can leave project owners vulnerable to escalating costs but provide contractors with low risk.
- Guaranteed Maximum Price (GMP): A variation of the Cost Plus contract, a GMP includes a cap on the project cost that the contractor must not exceed. It allows the owner cost certainty but if the actual costs are lower than the GMP, savings can be shared between the owner and contractor.
III. Advising Senior Stakeholders
When advising senior stakeholders on which delivery method and contract structure to use, a PMI-CP should consider factors like project complexity and size, the owner’s degree of control, project schedule, and cost predictability.
For instance, on a complex, time-sensitive project, a DB delivery method combined with a GMP contract structure could reduce schedule delays and provide predictable costs. However, if the project prioritizes design quality and price competition, a DBB delivery method with a lump-sum contract could be more suitable.
The advice to project stakeholders is not always straightforward and may involve presenting multiple options with their associated pros, cons, and levels of risks. The PMI-CP’s role is to provide detailed and weighted information to support informed decision-making.
As PMI-CP candidates prepare for their examination, it is essential to understand that there is not a one-size-fits-all delivery method and contract structure for all construction projects. Stakeholders must be able to justify and stand by their decisions, facing the resultant tradeoffs head-on. The success of this decision-making process will largely hinge on the professional’s ability to communicate effectively, understand stakeholder needs, and apply PMI theory in practice.
Answer the Questions in Comment Section
True or False: All projects require the same delivery method and contract structure.
- True
- False
Answer: False
Explanation: Different projects have different requirements and objectives, thus, the delivery method and contract structure that best fits one project may not necessarily be suitable for another.
The Delivery method of a project should be determined based on:
- a) Size of the project
- b) Risk of the project
- c) Timeline of the project
- d) All of the above
Answer: d) All of the above
Explanation: The delivery method for any construction project should be determined considering its size, associated risk and the desired timeline for its completion.
A fixed price contract is best suited for projects with:
- a) Unclear specifications
- b) A high probability of changes
- c) Clear specifications
- d) None of the above
Answer: c) Clear specifications
Explanation: A fixed price contract is ideal if the project specifications are clear and the risk of changes is low, as it helps control costs.
True or False: The cost-plus contract structure is suitable when the scope of the project is undefined.
- True
- False
Answer: True
Explanation: A cost-plus contract allows flexibility in adjusting the project scope and can be useful when the project’s parameters are not entirely defined.
The delivery method most often associated with a higher level of contractor involvement in the project design phase is:
- a) Design-Build
- b) Design-Bid-Build
- c) Construction Manager At Risk
- d) Integrated Project Delivery
Answer: a) Design-Build
Explanation: In Design-Build delivery, the contractor participates in both the design and construction phases, offering a singular point of responsibility in an attempt to reduce risks and overall costs.
True or False: A Time and Material contract structure does not focus on cost control.
- True
- False
Answer: True
Explanation: The Time and Material contract structure focuses more on flexibility, allowing the scope of work to change, but it does not necessarily offer strong cost control mechanisms.
The contract structure primarily used for hiring specialty contractors is:
- a) Lump Sum
- b) Unit Price
- c) Cost Plus Fixed Fee
- d) None of the above
Answer: b) Unit Price
Explanation: Unit Price contracts are often best when the work, or quantity of work, is unknown, as can often be the case with specialty contractors.
Determine the best contract structure for a complex project with unclear design decisions.
- a) Lump Sum
- b) Time and Material
- c) Cost-Plus
- d) None of the above
Answer: c) Cost-Plus
Explanation: Cost-Plus contract structures are best for complex projects with unclear design decisions or when project scope is unknown, as it allows for flexibility in pricing.
In a Design-Bid-Build delivery method, who is responsible for the design phase?
- a) Owner
- b) Contractor
- c) Architect or Engineer
- d) None of the above
Answer: c) Architect or Engineer
Explanation: In the Design-Bid-Build method, the owner contracts separately with the architect or engineer and the contractor, and the design professional is responsible for the design phase.
True or False: The owner maintains more control over design in the Design-Build delivery method than in Design-Bid-Build.
- True
- False
Answer: False
Explanation: In Design-Build, the owner has less control over design details because the contractor has primary responsibility for both design and construction, unlike Design-Bid-Build, where the owner contracts separately with the design professional and contractor.
Which contract structure is known for providing excellent cost control?
- a) Lump Sum
- b) Cost Plus Fixed Fee
- c) Time and Material
- d) Cost Plus with Guaranteed Maximum Price (GMP)
Answer: d) Cost Plus with Guaranteed Maximum Price (GMP)
Explanation: Cost Plus with GMP contract structure is well-known for its ability to provide excellent cost control, as it allows for the contractor’s profit to be determined upfront and it sets a maximum price on the contract.
In a Design-Bid-Build delivery method, who bears the most risk?
- a) Owner
- b) Contractor
- c) Architect or Engineer
- d) Subcontractors
Answer: b) Contractor
Explanation: The contractor is usually the party that bears the most risk in a Design-Bid-Build delivery method, as they are responsible for the execution and completion of the project based on the plans provided by the architect or engineer.
Thanks for this insightful post on advising senior stakeholders. It is very helpful!
Can anyone elaborate on the pros and cons of a Design-Build delivery method for large projects?
In my experience, lump-sum contracts often lead to fewer disputes if the project scope is well-defined at the outset.
What about hybrid contracts? Do they provide the best of both worlds?
Excellent article! Learned a lot about contract structures.
Does anyone have experience with performance-based contracts in construction?
What delivery method would you recommend for a renovation project with a tight deadline?
Appreciate the detailed insights into contract structures!