There are many factors influencing the type of Construction Contract and Procurement Method used for a particular project.
Possibly the factor with greatest influence is whether or not public money or a public owner is involved. Public Contracts are nearly always required to be procured by means of Competitive Bidding, while private work is not subject to this requirement, although some private owners may opt for a competitive bid anyway.
Competitive Bidding is a Procurement Method where the Owner offers the project to qualified bidders to offer a bid price for the Contract based on very complete Contract Documents. A modified form of this method, often used in private work, offers the project to a selected list of qualified bidders chosen by the Owner, for bidding in a similar manner. Public work cannot typically use this method, which involves selection and higher qualifications of the select list.
Direct Selection, or Negotiation is a Procurement Method where the Owner directly selects or invites the Contractor to negotiate a price for the Contract based on some form of Contract Documents, which may or may not be complete. Often, early stage design documentation is used and the provision of the Contractor's pricing and coordination skills become part of the contract scope.
Another factor is the Project Delivery Method desired. Again, the divisions between methods are often divided between public and private work, although some public agencies are now able to procure projects using a Design-Build method.
Types to consider include:
- Single Prime Contract: Still the most common kind of Construction Contract.
- Multiple Prime Contract: Used where fast-track construction is desired or multiple contracts are required (sometimes by law).
- Construction Manager Advisor: Could be combined with either of the two above.
- Construction Manager Contractor (At-Risk) Could be combined with either of the first two above.
- Design-Build: The A/E and Contractor are the same entity, a very different form of delivery.
- Owner-Builder: The Owner and Contractor are the same entity, another very different form of delivery.
Basis of Payment, or Compensation is also a factor. Some Project Delivery methods and Contract Types lend themselves to different compensation methods, which offer different values to the Owner.
Lump Sum: Where the lowest price can be guaranteed on bid day, but the final price of the project is not known until completion or after.
Cost Plus A Fee: This method does not offer much certainty about the price, but does ensure that the costs and fees are transparent and visible to all parties.
Guaranteed Maximum Price: A variety of Cost-Plus-A-Fee, where the Project's Maximum Price is known at time of Contract signing, but whether this is the lowest price obtainable is not known.
Unit Price: Where the Cost for a given unit is known, but the ultimate scope cannot be predicted or is subject to change.
Each of these methods of compensation can be specified to occur periodically, or in different intervals depending on project size, complexity and financing.
These Procurement Methods, Project Delivery Methods, and Methods of Compensation are capable of combination and re-assembly into an almost infinite number of combinations, depending on the Owner's needs, Project requirements, and Legal constraints. For further reference, see CSI PRM Module 3 for Proejct Delivery.
For purposes of our future discussion, the Single Prime Contract, Design-Bid-Build will be the method we will discuss, it is the most common, although maybe not the simplest, of the methods.
Each of these Contracts will have the same following basic Elements:
- Identification of the Parties and a statement that the Parties make a promise constituting an offer;
- Both Parties sign, indicating understanding and agreement
- Both Parties receive consideration and possess legal authority to negotiate a contract.