Structures for Construction Contracts
When you are starting your construction project, the first question you need to ask yourself is: “What project structure am I moving forward with?”
The answer determines what style of construction contract you will need.
The traditional construction model is called “design-bid-build”, however, as we will see, there are many variants of this type of arrangement. Under this structure, typically the owner:
- hires a consultant (e.g. architect or engineering firm) and completes the design (the “design”)
- puts the project out for tender (the “bid”)
- selects a contractor to build the project on its own, or using subcontractors, and then hands the project over to the owner when it is done.
Using this structure, the owner needs a pure construction contracts where the contracts acts as the general contractor (“GC”).
In some cases using the “design-bid-build” model, the contractor does not build the project itself and hand it over to the owner; rather, the contractor sources the trades to build and complete the work, but the owner contracts directly with the trades. Contractors might prefer this variation because they can limit their liability for any issues or non-performance by the trades. However, from the owner’s perspective, the owner is now responsible for managing all the trades; if the owner just hired the contractor to manage the trades directly, then the responsibility – and the liability – rests with just one person, the contractor who acts as the construction manager. It should not be surprising, then, that contractors who work as a “one-stop-shop” arrangement will charge a premium on their fee.
There is also another variant on the “design-bid-build” model, where the contractor does some design work (typically, minimal design work). This work might involve “shop drawings”, which show the precise details of how each element of the construction is to be built, down to the finest detail such as the location of wall outlets and the routing of ductwork. If an owner decides to involve the contractor in this design work, then the owner gives up a degree of control over the project to the contractor, as the contractor is involved in both the design and building of the project.
There are also many hybrid models of contract. For example, a project may be mostly done with the traditional “design-bid-build” model, but where some elements are designed-built by the GC. Or, where there is a GC, the owner will share the responsibility for certain trades (typically, more specialized trades where the owner has an interest or expertise) with the GC.
The important thing to note here is that a construction contract is a flexible document which can be tailored to multiple project structures. Whatever the structure, it is critical that the owner and contractor(s) have a clear agreement in place which accurately reflects the structure of the project.
Aura LLP is experienced in drafting and structuring construction contracts, including bid-and-tender contracts and procurement agreements. Contact Aura LLP to schedule a free 15-minute consultation.