Construction Contract Management: A to Z Guide
Construction contract management is an essential aspect of program management that ensures the project implementation is flawless and meets regulations and customer expectations. Fortunately, with the advent of technology, specialized construction contract management software makes the job easier for all parties involved.
This post explores the benefits of construction contract management and what it entails.
What is Contract Management in Construction?
Contact management in construction is a process through which partners in a project define their roles and responsibilities to ensure the project runs flawlessly and cohesively. Similarly, construction contract management mitigates risk by defining parties’ roles and consequences when a party doesn’t meet its mandate.
Contract management in construction involves managing the relationships between project partners such as vendors, contractors, financiers, employees, and customers. The goal of construction contract management is to ensure optimal and transparent operational and financial performance and reduce risks for the project’s entirety.
Contract management poses a bigger challenge in the construction industry as the field is riddled with a high-risk, hazardous, and highly competitive environment. As a result, handling contractor and sub-contractor input while ensuring safety and health standards are met makes managing any construction project challenging.
However, with the proper contracts, developers can ensure construction projects run smoothly, on time, and within budget. So, what types of contracts are common in the construction industry?
Commonly Used Types of Contacts in Construction
Under this contract, the contractor gets paid all construction-related costs in advance. Most contractors prefer this type of contract as one of its benefits is the ability to purchase construction materials early and avoid losing money later when the costs might be higher.
Similarly, a cost-plus contract is more advantageous when a contractor doesn’t have enough data to provide a precise cost estimate or the project is now well-defined.
However, the contract has some downsides. The major downside is most have ‘not-to-exceed’ amounts that limit how much contractors can spend on the project. Simial
Typically, a project financier will get a design before looking for construction bids for a project. This means there are two contracts involved – one to design and another to build, making the process longer and involving more parties than necessary.
A design-build contract eases a construction project by ensuring the same party handles the whole process. Involving a single party using this type of contract enhances collaboration, increases efficiency, and streamlines communication.
The downside, however, is that costs might be higher due to the lack of a competitive bidding phase for the construction.
Guaranteed Max Price Contract
As the name suggests, this contract has a capped project cost. Therefore, it guarantees the financier won’t pay past a specific threshold for the entire project. Should a project cost more than agreed on the contract, the contractor is liable to cover the additional expenses.
This reduces the cost risk for the project owner and makes budgeting easier. If the project costs less than the agreed amount, the owner receives all or shares the cost savings with the contractor.
The downside of this construction contract is it gets complicated to make a precise estimate for multi-phase projects and exposes the contractor to major losses if they underestimate the project costs.
Incentive Construction Contract
This contract type involves incentivizing the construction project. Typically, the contractor and owner will agree on a payment provided the project is completed within a specific timeline and budget.
The goal is to finish the project without exceeding the project estimate. If the contractor manages to deliver within the deadline and at a lower-than-estimated cost, they get a bonus payment, which is the incentive.
The biggest benefit of these contracts is their ability to control costs and ensure contractors stay on schedule. As a result, this type of contract compels contractors to implement innovative techniques to cut costs and increase project completion speed.
Similar to other projects, this also has downsides like requiring more intense negotiations to agree on the incentive and identify what a complete project entails.
Construction Contract Management Process
Construction contract management is a multi-phased endeavor that involves defining the different processes with a single goal – to organize efforts and structure the delivery process. A contract describes the following stages of the construction process:
Scope of Work
Arguably the most critical aspect of a construction contract, the scope of work is a detailed description of each contractor’s specific tasks and objectives. It defines what a contractor needs to do for them to meet their contractual obligation and is an essential reference point when evaluating deliverables.
Most importantly, it helps contractors understand which works fall under their docket, so they avoid taking up roles outside their scope.
General and Special Conditions
These are conditions that detail the ‘how’ of a project. The general conditions define the contractors’ rights and responsibilities and lay out each party’s roles and duties. These conditions are essential because they’re the foundation that guides contractors on processes to follow each step of the way, such as:
- How to submit change orders
- How to approve payments
On the other hand, special conditions are amendments to general conditions that detail the specifics of a distinct portion of the project.
The construction schedule is a detailed description of the expected timeline for the completion of each phase of the project. It’s a roadmap detailing how and when a project will be completed.
It features timeframes and milestones that help track progress to ensure the contractual agreements are on schedule.
This part of the contract is the quality assurance aspect. In other words, the contract specifications define the materials types, the quantities, and their quality. It also defines the technical aspects of a project and performance requirements.
Typically, specifications are prepared by the architect or engineer before they’re verified by the client and forwarded to the contractor.
Bill of Quantities
This document is a budget that details the itemized cost of materials, parts, and labor required for the project. A bill of quantities is essential as it enables contractors to estimate project costs more accurately.
Typically, this is prepared by a building estimator or quantity surveyor.
A cost estimate is one of the most complex aspects of a construction contract. This estimate predicts the project’s overall cost and is an essential part of project management, lest you start and are unable to finish a project two-thirds of the way.
List of Construction Insurance Coverage
Construction projects have major risks, from health and safety to professional liability. As a result, they require different types of insurance to ensure all parties involved are protected in the event of accidents on the site or delays in project completion.
A construction contract lists all insurance covers available to protect workers, equipment, contractors, and project owners from unforeseen circumstances.
The construction industry is booming, yet inconsistencies and inefficiencies still plague it. As the project budget and size increase, keeping up with the paperwork and other project needs becomes an uphill battle for project managers.
However, with construction management software, these processes have been improved significantly. From scheduling, controlling, and estimating costs to quality and safety control, construction management software is increasingly becoming the go-to tool for project partners looking for efficiency and accuracy.
The importance of contract management in construction
For an industry worth $1.9 trillion in 2021, construction contract management software can save the industry hundreds of millions by streamlining project implementation, estimation, and implementation.
Construction management software is not only about saving costs. It’s also about ensuring you’re following industry regulations. Construction projects are often subject to change. With manual processes, keeping up with the changes and communicating them to regulators sometimes proves impossible, exposing developers to fines.
However, construction management software has a much easier time keeping track of the changes and notifying the relevant parties on time, enhancing compliance.