Project Management for Construction Chapter 8

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Project Management for Construction Chapter 88. Construction Pricing and Contracting8.1 Pricing for Constructed FacilitiesBecause of the unique nature of constructed facilities, it is almost imperative to have a separate pricefor each facility. The construction contract price includes the direct project cost including fieldsupervision expenses plus the markup imposed by contractors for general overhead expenses andprofit. The factors influencing a facility price will vary by type of facility and location as well. Withineach of the major categories of construction such as residential housing, commercial buildings,industrial complexes and infrastructure, there are smaller segments which have very differentenvironments with regard to price setting. However, all pricing arrangements have some commonfeatures in the form of the legal documents binding the owner and the supplier(s) of the facility.Without addressing special issues in various industry segments, the most common types of pricingarrangements can be described broadly to illustrate the basic principles.Competitive BiddingThe basic structure of the bidding process consists of the formulation of detailed plans andspecifications of a facility based on the objectives and requirements of the owner, and the invitation ofqualified contractors to bid for the right to execute the project. The definition of a qualified contractorusually calls for a minimal evidence of previous experience and financial stability. In the private sector,the owner has considerable latitude in selecting the bidders, ranging from open competition to therestriction of bidders to a few favored contractors. In the public sector, the rules are carefullydelineated to place all qualified contractors on an equal footing for competition, and strictly enforcedto prevent collusion among contractors and unethical or illegal actions by public officials.Detailed plans and specifications are usually prepared by an architectural/engineering firm whichoversees the bidding process on behalf of the owner. The final bids are normally submitted on either alump sum or unit price basis, as stipulated by the owner. A lump sum bid represents the total price forwhich a contractor offers to complete a facility according to the detailed plans and specifications. Unitprice bidding is used in projects for which the quantity of materials or the amount of labor involved insome key tasks is particularly uncertain. In such cases, the contractor is permitted to submit a list ofunit prices for those tasks, and the final price used to determine the lowest bidder is based on the lumpsum price computed by multiplying the quoted unit price for each specified task by the correspondingquantity in the owners estimates for quantities. However, the total payment to the winning contractorwill be based on the actual quantities multiplied by the respective quoted unit prices.Negotiated ContractsInstead of inviting competitive bidding, private owners often choose to award construction contractswith one or more selected contractors. A major reason for using negotiated contracts is the flexibilityof this type of pricing arrangement, particularly for projects of large size and great complexity or forprojects which substantially duplicate previous facilities sponsored by the owner. An owner may valuethe expertise and integrity of a particular contractor who has a good reputation or has workedsuccessfully for the owner in the past. If it becomes necessary to meet a deadline for completion of the 249project, the construction of a project may proceed without waiting for the completion of the detailedplans and specifications with a contractor that the owner can trust. However, the owners staff must behighly knowledgeable and competent in evaluating contractor proposals and monitoring subsequentperformance.Generally, negotiated contracts require the reimbursement of direct project cost plus the contractorsfee as determined by one of the following methods: 1. Cost plus fixed percentage 2. Cost plus fixed fee 3. Cost plus variable fee 4. Target estimate 5. Guaranteed maximum price or costThe fixed percentage or fixed fee is determined at the outset of the project, while variable fee andtarget estimates are used as an incentive to reduce costs by sharing any cost savings. A guaranteedmaximum cost arrangement imposes a penalty on a contractor for cost overruns and failure tocomplete the project on time. With a guaranteed maximum price contract, amounts below themaximum are typically shared between the owner and the contractor, while the contractor isresponsible for costs above the maximum.Speculative Residential ConstructionIn residential construction, developers often build houses and condominiums in anticipation ...