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Which contract type is right for you?

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So, you have bought or leased a space, and want to construct the business of your dreams on the property.  The zoning is correct and the project either does not require site plan approval, or site plan approval is already complete.  Where do you go from here?

When building a new space, there are typically 3 types of popular construction contracts you can pick from:

  • Lump-Sum Design-Bid-Build
  • Design-Build
  • Construction Management

Picking the right contract is very important.  It can have considerable ramification for the construction of your clinic.  It is important to understand how each contract works and what constraints it imposes on the rights of the owner.

Lump-Sum Design-Bid-Build

This is the most popular type of construction contact.  In this contract structure, the project owner typically selects a design team first, and fully designs the project.  The project falls into several distinct phases:

Permit Set of Documents:  The design team (interior designers, engineers and/or architects) selected by the project owner prepare a full set of documents for permit application

Permit Application: The project owner applies for permit with the local building department

Tender Set of Documents: The design team and the project owner select all the different materials and finishes complete with full list of manufacturers, model/product numbers, and complete an overall project design.  The material list include all laminates, countertops, doors, frames, hardware, glass, glass film, drywall, ceiling tiles, flooring, wallpaper, paint colours, accessories, plumbing fixtures, lighting, diffusers, grilles, etc

Tender:  The project owner and the design team send the tender documents along with any site regulations to qualified contractors to provide pricing for the job.

Construction: Once the right contractors has been selected, the construction can begin.

The contract is defined by the tender documents.  Whatever is listed in these documents is included in the contract.  Anything not noted is excluded from the contract.

The benefits of this type of this type of contract include:

  • The project owner will receive apple-to-apple pricing from all contractors and knows if they are getting a good deal.
  • The project owner has full control over the project design and finishes.  The finished space will look exactly the way the client intends.

The disadvantages of this type of contract include:

  • The project owner completely loses control over project costs and project schedule.  The project costs and schedule are determined by the finishes selected by the client.
  • All design risks fall to the owner.  If anything is missing from the drawings, it is not included in the tender and will be an extra cost to the owner for the contract.  If an inspector demands any additional work not noted in the drawings, the owner will have to pay for the additional cost of accommodating them.

This type of contract is best for clients that have a vision for how their project should look and when aesthetics of the space are very important.    

Design -Build

Design-Build is the second most popular contract type in construction.  In this contract type, the client will select a contractor (typically called a “design-builder”) and will sign a contract based on general guidelines often referred to as “Owner’s Statement of Requirements”.  

In this contract type, the contractor will hire all the necessary members of the design-team, prepare the tender set of documents and will apply for permit on the Owner’s behalf.  The contractor will also select all the finishes (subject to colour and pattern selections by the client), and complete the tender set and begin construction.

The benefits of this contract type for the project owner include:

  • Design-Build projects, where the owner does not interfere too heavily on the design, tend to be less expensive and the design-construction process tends to be faster.
  • At times, the contractor may be able to perform some work before the design process is fully completed, further speeding up the process.
  • The contractor assumes all risk for design errors and omissions, since the design portion of the work is part of the contractor’s scope of work.

The disadvantages include:

  • The owner does not have full control over the project design.  If the owner wants a very specific project design for any particular element, these items can be outside of the contractor’s budget and lead to additional costs for the client.  If the overall project vision is very specific, these costs can accumulate leading to an extremely expensive project.
  • It is difficult to compare design-build pricing between different contractors.  For example, one contractor may be pricing the project $10,000 cheaper than the next closest competitor, but include lighting material that is $20,000 less expensive.  In this case, the cheapest price is not necessarily the one with the most value for the project owner.

Construction Management

Construction Management is generally the most sophisticated contract type available to a project owner.  It is significantly different than the other two options.  Construction Management is extremely complicated and requires the owner to have the infrastructure to invest a significant amount of time deeply involved in the overall project, often getting involved in extremely niche construction and project details.  This type of contract is wrong for any client that cannot have one or several employees working directly for them, who can attend regular project meetings, investigate project details and sign paperwork.

In this type of project, the contractor (typically called the “construction manager”) acts somewhat similar to an advisor to the client.  The client will select every subcontractor who will work on the project and may even sign contracts with them directly, pay each subcontractor directly, and order material for the project directly.  The contractor will charge a fee for their expertise.  This fee may be a fixed fee, a variable fee based on time, a variable fee as a percentage of the overall project costs, or most likely, a combination of any of these three fees.  These contract type is subject to the following phases:

Preconstruction: The contractor will review the designs for the client and advise regarding material selection to meet the client’s cost and schedule goals.

Permit Submission: The contractor will assist the project owner in the permit application process.

Tender: The contractor will hold tenders to subcontractors and suppliers and make recommendations to the owner regarding their selections.

Construction: The contractor will manage the subcontractors and suppliers and oversee the project on site to completion.

The benefits of this contract type are as follows:

  • The contractor and the project owner are on the same team.  There tends to be more camaraderie and cooperation and less fighting between these parties in this contract type.
  • The owner has full control over the project. This includes not just the parameters and designs but even over project costs, and the subcontractors performing the work.

The disadvantages of this contract type include:

  • The owner must spend a significant amount of time involved in the management of the project.  The owner will need to deal with project paperwork and communications on a daily basis.
  • The owner assumes all risk.  This includes not only the risk of design issues, but also any scope gaps (items missed during tender) which the contractor would  normally assume in other contract types.

Hopefully this information can help you in selecting the type of construction contract you wish to select for your upcoming project.  If you have any questions or wish to further review how each contract type works, please contact our office and speak to one of our knowledgeable staff regarding how to plan your overall project and its contracts.

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Poyan Nahvar

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