The construction contract between the owner and CM is a legally binding contract but its terms are not universal. The owner should negotiate the specifics of the contract requirements and the particular needs of the project.
The more knowledgeable the owner – often represented by the facility executive – is about the nature of the terms of the contract, the greater the awareness of the potential for hidden costs. Uninformed owners can unwittingly agree to pay more money for a longer period of time than necessary.
Demonstrate your understanding of the construction process by first knowing the unit prices and labor costs of every item you agree to purchase and negotiating the following standard construction contract line items.
• General Conditions. General Conditions should only be those non-construction costs that are necessary to get the job done and are directly applicable to the project. All general conditions should be a line item amount agreed to and guaranteed before the start of construction. Typical components of general conditions include funds for a site office, on-site project administration labor and necessary office equipment. Do not accept an amount that is expressed as a percentage of the cost.
Substantial savings can be realized by asking the right questions about general conditions. For example, question the site office requirements presented by the CM, including how much new equipment is necessary. Who should assume the cost of purchasing and installing the computer equipment and software the CM lists as a site office requirement?
• Overhead. Overhead is the CM’s cost of doing business. Should the owner be responsible for that cost? An argument can be made that the owner need only pay for costs directly applicable to this specific project, and not for costs the CM incurs on other jobs. This line item in particular is often the subject of legal disputes. Do not be afraid to eliminate elements of cost contained in this category and, again, do not accept an amount that is expressed as a percentage of the work.
• Hourly Wages. Agree to pay only the wages for work on your project. The actual hourly wages, taxes and benefits (not a multiple of these) are the owner’s responsibility. Time off and educational seminars are not. Avoid a situation where you are asked to pay wages for a general superintendent or any other part-time supervisory personnel.
• Construction Fees. To determine a fair construction fee, negotiate a percentage based only on the cost of the work. Be careful of the language of the contract. All fees are a direct percentage of the cost of the work, before the contingency and general conditions are added. A fair 4 percent construction fee could be 4.5 percent if taken as a percentage of a cumulative total. On multi-million dollar jobs, this can represent a substantial amount of money.
Insist that the fee be converted from a percentage to a fixed amount before construction starts. Once construction starts and the potential for change orders (that can increase the cost of the work) exists, the fee will continue to rise without limit. Don’t allow the construction budget to be compromised in this way.
• Contingency Fee. Most CMs require that a contingency fee be built into the guaranteed maximum price. The only responsible way to manage the necessary contingency fee is to insist that it be jointly controlled by the owner and the CM. Neither the design nor the construction process is a perfect science; CMs will insist that they need to “manage their risk” with the contingency fee. Maintaining some control over the allocation of funds will enable the owner to best justify the expenses.
When negotiating the contract, the owner must “buy the schedule” with the cost of construction and guard against it slipping. Extending the construction phase is a costly decision.
Agree on the completion date of the project and insist that a penalty be levied if the project is delayed. Do not agree, however, to a bonus if the project is finished before the scheduled delivery date. The CM might deserve a bonus for early delivery if extraordinary problems were overcome, but does not necessarily deserve bonus dollars for performing the job you hired them to do.
