March 20, 2023 How to Choose a Contract for Your Construction Project

Industry leaders planning construction projects may not realize the contract they select has a major impact on budget and project delivery.

You want your contractor to deliver your construction project on time and within budget. But did you know there are several options for exactly how you want that successful project delivered? The construction industry offers a variety of contract types to meet the needs of different customers, and for different types of projects. The right project delivery method depends on many project factors, including:

• Scope
• Budget
• Schedule
• Desired level of owner involvement
• Risk tolerance

A contract that addresses legalities is crucial, but choosing the right contract can be challenging, especially for those overseeing a building project for the first time. With today’s shifting economy and supply chain challenges adding risk, proactively identifying potential issues with the right contract can help avoid cost escalations and unexpected surprises and support the planning process.

Because every project is different, there are multiple contract options available that can be used to complete projects of varying sizes and complexities. Here are some tips on how to choose the right contract for your next construction project.

Learn About Your Choices

There are four common project delivery methods, each with its own benefits. The first step to choosing the right method for your project is familiarizing yourself with each of the methods and how they work.

• Construction Manager at Risk (CM@R): Project owners facing complex projects with little time for hands-on involvement will want to consider the CM@R contract. This contract takes the burden off the owner by getting a construction manager involved early to oversee the project from design to finish. Projects are also delivered with a Guaranteed Maximum Price (GMP) which means that the project price is set regardless of actual costs – a potential financial benefit for owners.
• Design-Bid-Build (DBB), also called General Contractor (GC): The most common project contract, this is often used for simpler commercial construction projects. Owners looking for more control like this option as they are able to choose an architect to complete all design work first. Contractors are selected in a ‘lowest bidder’ process which can offer perceived cost savings but can sometimes result in sacrificing quality or scheduling due to potential substandard work.
• Design-Build (DB):  This contract positions the construction manager as a single point of contact for all project work. It allows owners to be hands-off while the contractor collaborates on design and manages construction teams. This option is useful for smaller, more flexible projects that need to be completed quickly.
• Integrated Project Delivery (IPD):  The most collaborative contract option, IPD allows project stakeholders to share the risks and rewards of a project. The architect, project owner and contractor are aligned by one main contract with mutually agreed-upon goals. This method is based on mutual trust, which can lead to transparency and less waste.

Consider What’s Important

Benjamin Franklin once said, “by failing to prepare, you are preparing to fail.” For companies who are planning major construction projects, weighing the pros and cons of each contract option in alignment with project priorities can reduce the risk of costly issues, improve efficiency and ultimately improve the quality of the work.

Budget: CM@R provides a Guaranteed Minimum Price which allows project owners to know exactly what they’ll pay while motivating construction managers to closely monitor timelines.  Design-Bid-Build can be cost-effective because it allows for choosing the lower bidder and involves the contractor and designer from the beginning, which can reduce changes and additional costs. 

Level of involvement: Design-Bid-Build and Integrated Project Delivery contracts allow the project owner much more control and opportunity for collaboration, while methods like Design-Build, where the owner is removed from the process, can lower transparency because some characteristics, like subcontractor costs, aren’t as visible to the project owner.

Who carries risk: Carrying the risk is important to the project should something go wrong. A method like Integrated Project Delivery allows risk to be shared among all project stakeholders, while in Design-Build, much of the risk falls on the contractor. In CM@R, none of the risk falls on the project owner.

Project owners should know the pros and cons associated with each contract to make an educated decision on which is right for them. Learning the challenges of each contract is an effective way to visualize possible road bumps. Make sure to ask questions regarding budget, risk level, transparency, accountability and quality of work to evaluate what method is best. Ultimately, choosing the right project contract can ensure a smoother construction process and better outcomes.

Aaron Stelzer is a Project Development Manager at Riley Construction headquartered in Kenosha Wisconsin.

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