What are we building and what’s the real price?
Fundamental to a construction agreement are two seemingly basic and simple concepts: the scope of work and the total project price. Yet, they are frequent sources of dispute and litigation. Common problems are:
- The construction drawings lack sufficient detail which leads to different interpretations between the subcontractor and contractor, and potentially to price disputes between the owner and contractor.
- The plans, specifications, shop drawings and related documents, which together constitute the owner’s vision, are incomplete at the time the construction agreement is signed or are inconsistent with one another.
- What the owner understands as a fixed price is really cost-plus, because there are many “allowances” which budget a lower priced material or level of craftsmanship than what the owner envisions.
- The cost-plus agreement includes contractor charges that are characterized as “cost”, but sure look like another contractor profit center.
To achieve team objectives everyone must:
- The collaborative efforts of the owner and design professionals produce drawings and specifications which both capture the owner’s vision and leave virtually no aspect of the construction project design unclear or incomplete. And this needs to be accomplished and delivered to the contractor as part of the bid process. In order to achieve this, the owner must spend the necessary time and money with the design professionals to make certain that all design documents are complete and accurate.
- The contractor receives a complete package from the owner and design professionals (including the interior designer and landscape architect, if applicable) and bids the job with as few allowances as possible. Where there are allowances, the contractor ensures that the owner understands fully what assumptions have been employed when determining the budget for an allowance. The key here is that the owner and contractor must be realistic with one another. An allowance should not be viewed by either party as a future negotiation event. The contractor must provide the owner with a detailed list of what has been selected by the contractor for the category for which an allowance is given (for example, how do you know the flooring, cabinet or landscaping allowance is sufficient without reviewing the actual tile or wood samples, cabinet doors and a list of specific trees and scrubs and their quantities?). The owner must not turn a blind eye and think somehow an insufficient allowance will improve with age.
- In a cost-plus contract, the owner and contractor define clearly all payments which will be made to the contractor for anything that is not allocable to a subcontractor. In other words, when the contractor characterizes an item as “cost” which is in fact overhead reimbursement for the contractor’s corporate overhead (not job site overhead) and moreover, in some cases not actual costs, but instead an item the contractor estimates as overhead — does the owner understand what the contractor is doing and after full disclosure approve of the concept? Does the owner agree that the business deal includes these payments? There are many good and legitimate reasons why a contractor should be paid for corporate overhead and other items. Further, a cost-plus agreement with site and corporate overhead also charged as an item of “cost”, can still save the owner significant sums versus a fixed-price contract. The key is full disclosure and a meeting of the minds at the beginning of the job.
Only when the owner, contractor, and design professionals have a clear and identical understanding of “what are we building?” and “what’s the real price?” can the construction team achieve team objectives.
In the next article, I will discuss the responsibilities, duties and risk each member of the construction team should assume only after there exists a clear understanding between the parties and the understanding is set forth in owner-contractor and owner-design professional agreements.