Construction contracts: Picking the right delivery method for owners
Most traditional contracting methods focus on offloading risk to another party. One of the most critical decisions for owners is choosing the right delivery method for their next project. Selecting a project delivery method often determines how much collaboration and innovation can be achieved during the process. This blog will discuss four methods: lump sum, construction management at risk (CMAR), design-build, and integrated project delivery (IPD), and Aegis’ unique perspectives on the benefits and challenges associated with each.
As the nation’s largest project controls company, The Aegis Companies has supported all project delivery methods for two decades. Our combination of project controls expertise and experienced construction professionals creates better, more predictable outcomes for every phase of project development. Our approach to construction management prioritizes project controls throughout project delivery and leverages our experience across various delivery methods and market sectors to benefit owners directly.
Understanding the different methods
Lump-sum is the most traditional method, where the contractor agrees to deliver a project for a fixed price by a specific date. The owner obtains design services independently of the contractor, and the contractor eventually bids on the project and builds it. This is the most transactional of contractual relationships between an owner and a general contractor and allows the least latitude for innovative building approaches.
Construction management at risk (CMAR) is when the construction manager commits to delivering the project within a guaranteed maximum price (GMP) by a specific date. Many owners engage the contractor during the design process before the design is completed. However, after the earliest part of the schematic design (SD) phase, the ability of the contractor to influence the design for an efficient build is significantly reduced. If the construction manager joins after the SD phase, constructability issues or unexpected cost overruns due to scope creep can cause significant delays throughout the design process.
Design-build is a streamlined approach in which one party, the design-build team (usually led by the contractor who manages and holds the agreement for the Designer of Record), works under a single contract with the project owner to provide design and construction services. The owner often awards these projects with either a detailed project program or bridging documents developed by a third party as the basis of the award. Selecting the design-build team is usually based on contractor and design firm qualifications, project team qualifications and experience, and fees. Proposals often come with a non-binding conceptual budget, which can become the basis for the future guaranteed maximum price and govern the design process to ensure budget adherence.
Integrated project delivery (IPD) is a collaborative approach where stakeholders (owners, architects, contractors, key subcontractors, etc.) work together from the start of the project under a single, multi-party agreement. They share the risks and rewards and make decisions collectively in the project’s best interest.
Which one should I use?
Lump sum is the best contracting method if an owner’s primary concern is shedding risk, provided they have a well-coordinated, complete design and a strong contract. This may be well suited for a smaller project where overall project duration – from land acquisition or executing a lease to project completion – is not a key priority. Experienced builders will show, however, that this contracting method – even when not rushed – does not necessarily yield the lowest price since the contractor is forced to cover their risk if there is any ambiguity in the design documents.
CMAR contracts are sometimes preferred by owners because they allow the owner to engage a contractor during the design completion process (usually for a nominal fee), facilitate the early procurement of long-lead equipment or materials, and utilize a GMP. This enables more visibility into the contractor’s budget and facilitates a broader use of line-item and project contingencies. The fee is also typically negotiated, so most project savings are treated as unspent funds, which are returned to the owner or split between the owner and the contractor as a modest fee enhancement opportunity in the prime contract. There is reduced risk overall for the contractor, but their potential fee enhancement is equally limited. Reductions in overall project duration are possible through adopting an incremental GMP, where the owner can authorize the release of construction activity on an ‘as-needed’ basis to facilitate early-stage work like site improvements or grading.
Design-build can be helpful for owners who lack the in-house resources to effectively manage the design process themselves (or to pay a third party) and want to phase the design to facilitate the shortest overall project schedule. But the myth that an owner gives up input into the design process is just that – a myth. Most design-build contracts grant the owner final design approval rights with the understanding that they will be responsible for any cost increases associated with enhancements they elect to implement throughout the design process. From a risk perspective, design-build removes the owner’s liability for a design flaw or coordination error. Still, they may pay a modest premium in enhanced fees to the design-build contractor, usually around two percent. Data on design-build also points to more predictable outcomes and a shorter overall project duration compared to more traditional delivery methods like Lump Sum or CMAR.
IPD offers numerous benefits over other contracting methods, such as improved communication, promoting a ‘project first’ mindset across all team members and parties, enhanced innovation and quality of outcomes, and shared risks and rewards. Because IPD requires owners, designers, engineers, contractors, and subcontractors to set aside decades of experience delivering projects under different delivery methods that allocate risk based on project role, assembling a project team with people who bring the behaviors and communication skills necessary for a successful IPD project is paramount. While IPD can lead to significant fee enhancement through shared savings clauses and growing the profit pool, Owners must know there is a sizeable risk if a project experiences substantial delays and cost overruns.
Owners have multiple options when selecting a contract, depending on project complexity, budget, timeline, available resources, and risk. With Aegis’ long history of demonstrated success across all project delivery methods, we are the logical choice to be your partner for any upcoming project.
Our construction managers approach all phases of project delivery with project controls at the forefront: how should we approach schedule, budget, resources, and risk to support the best possible project outcomes? Owners benefit directly from our unique experience across all delivery methods and market sectors from thousands of job sites. Whether it’s managing the standard solicitation and award process for a lump sum contract, strategically developing design packages to support an aggressive schedule on a CMAR or design-build project, or spearheading team cohesion and adapting standard processes as the IPD facilitator, our construction managers have lifetimes of experience from a diversity of projects that is second to none.
If you are considering a construction project and need expert advice on the best project delivery method, email newopps@consultaegis.com today to learn how our services can be a force multiplier for project owners and operators everywhere.
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