Construction Contract Fundamentals

7/29/2019 Construction Contract Fundamentals

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Construction Contract Fundamentals

Baker Tilly refers to Baker Tilly Virchow Krause, LLP,an independently owned and managed member of Baker Tilly International. 2010 Baker Tilly Virchow Krause, LLP


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About Baker Tilly

> Established in 1931

>

the United States*

According to Accounting Todays 2011 list of

.

> More than 1,300 professionals

> Baker Tilly Virchow Krause, LLP is the largest. . a er y n erna ona n epen en

member firm

> Baker Tilly International is the eighth largestpublic accounting network with representationin more than 110 countries

> Convenient, seamless resource for worldwide

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needs


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About Baker Tilly

concep un ng con ro s compliance, Baker Tilly has more than 250 dedicatedconstruction and real estate industry professionals to

assist with your facility development project throughall stages of the development lifecycle.

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Introductions

Tony Ollmann Erik Schuchardt

CCA, Director CPA, Manager608 240 2618 608 240 2439

[email protected] [email protected]

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Overview

Todays Topics:

Construction Lifecycle

Owners Responsibilities

Contracting Methods Key Risks

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Polling Question #1

A. To enhance my knowledgeof construction contracting

B. Because my organization

has a major upcomingconstruction project

C. I am interested in learningmore about how I can

construction projects at myorganization

. ons ruc on con rac s areunique and Im curious tolearn more!

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Please respond using the polling section in the WebEx screen to the right.


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Construction Lifecycle

Insert graphic from word doc

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*Architect/Engineer (A/E)


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Construction Project Management Team

Owners Internal Audit orRepresentative

Representative

Office of GeneralCounsel

ArchitectConstruction

Manager

Other Groups andta e o ers.

Internal & External

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Polling Question #2

A. Very familiar; I could

have a fast acedconversation with myconstruction team

with constructionterminology?

. am ar; wou ene

from a brush up on keyterms and risks

C. Unfamiliar with key termsand risks

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Key Terms

Competitive Bid

Negotiated

Master Services Agreement

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Key Terms

Contract Types: ump um pu a e um or xe r ce

Guaranteed Maximum (GMAX or GMP)

Unit Price

Time & Material Cost Plus Fixed Fee or Cost Plus Percentage Fee

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Key Terms

Contracting Methods: Competitive Bid

Negotiated

Construction Management Not at Risk

Prime Contracting

Direct Contracting

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Key Terms

Project Delivery Methods: es gn u

Design Build

Inte rated Pro ect Deliver

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Key Terms

Financial Terms: a or ur en a es

Overhead Rates

General Conditions

Procurement Burden and Mark-Up Overbilling

ggress ve ng

Value Engineering

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Construction Lifecycle: Feasibility and

Key Risks of This Stage: Stakeholder identification

Architect selection

Conflicting pragmatic and political objectives

Note: Architects and engineers are nottypically bid but are selected based upontheir technical qualifications

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Polling Question #3

Which contract method . Lump Sum

B. Cost Plus

is most used withprojects greater than$10M?

C. Unit Price

D. GMP/GMAX

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Construction Lifecycle: Contractor

Key Activities of This Stage:

responsibility)

Assemble bid package with specifications (facilitys

Request financial package Credit report

Audited or reviewed year end financials

Current financials or n rocess sc e u e

Backlog schedule

List of recent layoffs

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Key Activities Continued: n ca ors o nanc a wea ness

Significant changes in owners equity

Weak cash position

Repeated late payments to suppliers

Outstanding and recent contractors liens

Refusal to supply financial information, especially if it is thecurrent nanc a statement

Mitigation strategy: Request a performance bond. The bond

underwriter will also closely examine the financial strength ofe con rac or e ore un erwr ng e pro ec .

Caution: Performance bonds dont mitigate all of the risks! Anowner will not be reimbursed for time delays, cost of rework,

additional internal efforts, or cost of capital.

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Key Risks of This Stage: e ec ng a con rac or a s unqua e or oes no ave e

financial stability to deliver the project and support its warrantyobligations

Example:A financially weak contractor may result in suppliers and

.significant:

Liens against the building may prevent occupancy

Reluctance or refusal by professionals to work on the project

Lost discounts and credits, even late payment penalties

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Construction Lifecycle: Contracting

Key Activities: e erm n ng con rac me o

Negotiating contract terms, conditions,and provisions

Risks: Paying too much for the building

Restricting the owners ability to controlfinancial risk

Empowering the contractor to legallytake advantage of the owner

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Lump Sum:

Facility is fully designed

Designs are simple and often a duplicate ofanother facility

There are fewer unknowns that lead tochange orders

Benefits: Known financial commitment Less owners administrative burden

Less risk of scope creep and budget overrun

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Guaranteed Maximum Price (GMP) sua y use on arger pro ec s

Project nature is complex with unknowns

Often cou led with a concurrent desi n rocess

Benefits: Establishes a not-to-exceed price

Enables the owner to benefit from value addedengineering, price reductions, and well managedprocurement

Enables the owner to select and contract with thecontractor while still designing the facility

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GMP Continued

Disadvantages: Requires a more complex contract that specifies as much as

ossible

Burdens the owner with more project management andadministration

abuse behavior

Contractors like to believe that their budget is the entire

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Cost Plus or Time and Material Contracting sua y oun n g y comp ex an very arge pro ec s or

extremely small maintenance projects

Unable to determine or estimate the overall project cost

Projects typically last many years Used on projects like nuclear power plants and refineries

Enables an owner to segment a very large project into multiple

smaller projects

Advances the construction timetable so that progress is madeon simple phases while engineering continues on morecomplex phases

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Unit Price Contracts: yp ca y use n a u y se ng or ype o serv ce

Limited application, used on projects like underground pipingand road construction

These contracts establish a rate price for each type of serviceto be delivered

The deliver uantities ma or ma not be known

Unit price for each segment of work includes all direct and

indirect construction costs

High degree of control over scope and pricing

Chan e orders are easier to calculate

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Starting point:

American Institute of Architect (AIA) ContractsAIA written to favor the architect and contractor, not the owner and

should onl be considered a startin oint

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C i Lif l C i


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Provisions that apply to all contracts: ange or er process or scop ng, pr c ng, an

approval

Process for handling owner allowances and credits

Process and pricing for reduction in work scope Process for using and reporting contingency budget

Business ethics and professional conduct

Insurance, guarantee, and warranty requirements Right to audit clause

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P lli Q ti #4


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Polling Question #4

Why are change orders . Scoping and approvaloccur quickly

inherently more riskythan other constructionevents?

. Minimal documentation

C. Little to no competitivepricing

D.All of the above

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C t ti Lif l C t ti


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Change order provisions should includee o ow ng:

Definition of major and minor change order

Authorit for a rovin each t e of chan e order

Authority for using contingency budget Change order documentation

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Change order documentation shouldnc u e: Who is performing the work

Cost breakdown of materials and labor with uantities and

rates for each Contractor markup

Clear description of why the change order is necessary

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Example m on renova on pro ec

Design change necessitated $750,000 ofadditional electrical work

Construction contract defined change orderapproval, contractor billing rates andmarkup on materials.

Subsequent change order reviewuncovered markup had been taken on

materials and labor.

Contractor refunded the owner $46,000.

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Provisions that are mostapp ca e o an osPlus:

this covers Construction management fee and definition

-costs in the formula

Self-performed trade and craft costs ra e, cra , an pro ess ona ra e sc e u es

Allowable pass through expenses

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Costs typically included in Generalon ons:

Job site trailer and utilities

Winter conditions

Small tools charge Project manager and principal labor charges

m n strat ve an over ea costs

Layout yard and construction material storage

Value en ineerin

Accounting and project reporting

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Costs that are not typically included in

enera on ons an are e wner sresponsibility:

General foremen and supervisory costs Pickup trucks and transportation

Construction material purchasing and transportation

Computer and office equipment

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Provisions that are most

app ca e o anCost Plus:

burden rates Shared savings calculation

e -per orme wor

Bidding

Pricing Reporting

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y g

Labor Burden should not include: on rac or mar up or pro marg n

Overhead allowance

Vehicle allowance

Tool allowance Union dues

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y g

Labor Burden risks: verc arg ng or a owa e ur en cos s

Charging for non-allowable costs

Double char in for costs also covered b eneral conditions

Double charging for costs that are specific pass throughexpenses

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Shared Savings Calculations s an ncen ve program mu ua y agree upon e ween e

owner and contractor to share in savings that arise from:

Value engineering

Aggressive purchasing strategies

Shared savings risk: Materials that are commodity priced shoulde exc u e rom e s are sav ngs ca cu a on.

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Self-Performed Workra e an cra cons ruc on a s per orme y e pr me

contractor. Typical self-performed trades include: site preparation,concrete footings, floors and walls, wall framing, drywall finish,

.

Self-performed work should be competitively priced with aseparate pricing and scoping document explicitly definingscope, rates, materials and pricing method.

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Construction Lifecycle: Bidding


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Key Risks: ona ons an con rac or pre erence

Unethical bidding practices

Kickbacks

Courtesy bids and not competitive bidsExample:The prime contractor is also a concrete and masonry contractorand intends to bid on this phase of work. The other subcontractors

in the market dont believe that they will have a legitimate chanceto win the work and dont submit their best price for the work.The primes bid is lowest and they are awarded the concretework, even though this may not have been the lowest price

ac eva e.

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Preconstruction Planning and Due


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Action Items: s a s con rac ng goa s an o ec ves

Establish development teams roles andresponsibilities

Determine subcontracting methodology

Develop contractor qualification criteria

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Preconstruction Planning and Due


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Action Items: eve op awar cr er a

Develop owner communication requirements

Develo ro ect erformance re ortin re uirements

Develop project cost and financial reporting requirements Develop owners right to audit requirements

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Additional Contract Provisions


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Project performance reporting arne va ue repor ng

Cash requirements forecasts

Construction schedule

Budgeted costs to actual Estimate to complete forecast

Reporting requirements should include:

Delivery deadlines

Content

Format

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Pay Application (Invoice) Documentationac mon e pay app ca on s ou e accompan e y:

Material invoices and receiving tickets

Time sheets for self- erformed work

Subcontractor invoices Equipment logs for contractor provided equipment

en wa vers

Equipment rental invoices

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Contractor Payment Termsyp ca erms requ re e owner o pay e con rac or w n

days of the pay application invoice. Consider the followmodifications:

Payment period begins on the acceptance of a complete pay

application, not the pay application date Consider owner direct payment for major material purchases

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Right to Audit Language


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This must be reviewed by your legal counsel prior to

implementation:

Right to Audit

Availability of Records. The records of the parties to this Agreement relating to the Project,which shall include but not be limited to accounting records (hard copy, as well as computerreadable data if it can be made available; subcontract files (including proposals of successfuland unsuccessful bidders, bid recaps, bidding instructions, bidders list, etc); original estimates;

estimating work sheets; correspondence; change order files (including documentation coveringnegotiated settlements); backcharge logs and supporting documentation; general ledgerentries detailing cash and trade discounts earned, insurance rebates and dividends; any other

agreement, and all other agreements, sources of information and matters that may in Ownersreasonable judgment have any bearing on or pertain to any matters, rights, duties orobligations under or covered by any contract document (all foregoing hereinafter referred to asRecords) shall be open to inspection and subject to audit and/or reproduction by Ownersrepresentative and/or agents of Owner. Owner may also conduct verifications such as, but notlimited to, counting employees at the job site, witnessing the distribution of payroll, verifyingpayroll computations, overhead computations, observing vendor and supplier payments,miscellaneous allocations, special charges, verifying information and amounts through

, , ,

contractors representatives. All records shall be kept for seven (7) years after FinalCompletion.

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Right to Audit Language


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Right to Audit Continued:

Flow down.

CM/GC and Architect shall require that all of their payees (including Architects Consultants,Subcontractors and Suppliers) comply with the provisions of the Right to Audit article byincorporating these requirements in all written contracts. This requirement to include flowdown right to audit provisions in contracts with payees shall also apply to Subcontractors and

- , .request all of their payees to cooperate fully in furnishing or in making Records available to

Owner, provided, however, the CM/GC and Architect shall not be responsible for any failure ofArchitects consultants, Subcontractors or Suppliers to comply with recordkeepingrequirements after the date of Final Completion.

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Additional Resources


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www.bakertilly.com/construction-audit-webinar

. . https://www.thenaca.org/

http://www.caacci.org/

http://rsmeans.reedconstructiondata.com/

http://www.auditnet.org/

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Any Questions?

Please feel free to ask questions in the screen to your right.

We will answer as many questions as time permits.

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Contact Information


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608 240 2618

Erik Schuchardt

608 240 2439

[email protected]

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Construction Contract Fundamentals

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Transcript of Construction Contract Fundamentals