Construction Contract Types and Analysis

This assignment delves into different types of construction contracts, including fixed price, cost-plus, guaranteed maximum price (GMP), and target cost contracts. It examines the motives and benefits of adopting these contract types, particularly focusing on GMP and target cost contracts. The assignment also explores risk ranking and analysis within target cost contracts using empirical evidence from the construction industry. Additionally, it touches upon recommended practices for underground construction contracting and provides a comprehensive overview of design-build contracting.

Running head: PROJECT EXECUTION PLANNING AND MANAGEMENT 1
Project Execution Planning and Management
Name
Date

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Table of Contents
..............................................................................................................................................................1
Introduction..........................................................................................................................................3
Project delivery method.......................................................................................................................3
Financial Contract Type.......................................................................................................................4
Procurement method............................................................................................................................5
Conclusion...........................................................................................................................................6
References............................................................................................................................................7

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Introduction
In order to reduce traffic congestion and improve vehicular traffic throughput the NSW
government has awarded a contract to Westlink; the project entails expanding the M5 Motorway,
M4 Motorway, and M5 East from the present 4 lane highway to an eight lane motorway. The project
entails building interchanges and underpasses to enhance traffic flow, and especially move heavy
commercial vehicles underground from the Parramatta road. The project will also stimulate the
revitalization of neighborhoods. The project entails expanding 33 km of road and is expected to be
completed in 2023; it is expected to act as a future gold standard on how to manage public projects.
The project involves multiple stakeholders, including three main project contractors that have
merged to form a single entity (Westlink) with two consultants and three design companies. The
Australian Government will provide a concession of $ 1.5 billion, in partnership with the NSW
government so that phase 1 and 2 of the three phased project can be undertaken concurrently. The
project has enormous organizational as well as operational challenges. This paper reviews the
project challenges and deliverables and proposes, based on a weighted method, on the best way to
undertake the project. The scope of this paper is to propose the most suitable project management
and delivery method, by proposing, with justification, the best project delivery model, the best
financial contract type, and the best procurement method; with respect the the unique challenges of
the project and the required deliverables. The paper will then draw conclusions at the end.
Project delivery method
There are three methods in which the project can be delivered; namely; design-build (DB),
design-bid-build (DBB) and contract management at risk (CM@R). The DB model entails the
owner (in this case, the NSW government) selects and signs a contract with the DB team; the DB
team is usually a joint venture between different contractors that have their own designers and led
by a general contractor. The DB team makes the designs based on discussions with the owner. After
the design is done and the owner makes approvals, the DB team is then responsible for the entire
construction and delivery of the project, as well as coordination of design and construction
(Cushman & Loulakis, 2016). In the DBB model, the project owner procures the services of an
architect/ designer, who designs the entire project, with specifications for drawings, design, and the
contract packages. The entire package is presented to contractors (general contractors), who then

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bid for the project; the general contractors usually engage several subcontractors to bid for the
project, and usually, the lowest bidder gets the job.
The selected general contractor, working with their subcontractors, then become responsible
for building the project based on the design and there is increased control over the project by the
project owner (Warhoe, 2013). In the CM@R model, there is a construction manager who makes a
commitment to deliver a project at a GMP (guaanteed maximum price). The applicant for the
project designates a design engineer and a firm to undrtake CM@R in a discrete and separate design
and construction contract; the CM@R offers advice related to construction management during the
development of design. When the GMP is agreed upon, the CM@R becomes the general contractor
during the entire construction project and is used when the benefits of design-build benefits are
desired, as well as contractual control over project design and definition (Clough et al., 2015).
however, for the NSW road construction project, it is essential that various criteria based on the
unique project conditions and requirements be used to determine the best approach, using a
weighted scoring mechanism. The relevant criteria are listed in the table below, as well as the
weights and scores assigned to them, as guided by the project requirements and deliverables. The
criteria have been used in the context of the project challenges and circumstances, as well as the
deliverables (Dey, 2006).

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From the scoring and weighting, the most suitable project delivery model is the design-
build; this is because based on the selected criteria and the nature of the project, it is the most
suitable model. The project structure is such that the owner accepts less risk and the team that will
undertake the construction is a consortium with its in-house team of designers, consultants, as well
as subcontractors (Han, 2007). The general contractor (Westlink) is a joint venture; the project is
very huge and complex and requires experienced contractors with sufficient technical ability in-
house for managing design and construction. Further, having to manage traffic flow during
expansion and construction means known site factors as a criteria is given a higher weight, along
with experience, in-house technical ability, project size, delivery speed and budget that can best be
met under the DB model. The requirement to have an effective management structure that is
sustainable, the less direct involvement by the project owner and the complexity of the project
implies that DB is the most suitable approach, based on the scoring and weighting of the criteria
(Edgerton, 2009). The above analysis gave DB a cobined score of 811 (highest), followed by
CM@Risk (657), and lastly, DBB at 618.
Financial Contract Type
This pertains to the M4 long term financing structure and should be based on cash flows; it
has to take into consideration the risks and costs for financing (handfinger, n.d). Already, the
Government together with the NSW, have provided a concession of $ 1.5 billion, which is just 8.9%
of the entire contract sum. The project will be delivered in three stages; the concession will enable
the first two stages to be undertaken concurrently. There are three main forms of financial contracts
relevant to the M4 road expansion and construction; the lump sum financial type, the cost plus fixed
fee contract, and the guaranteed maximum price. The lump sum contract entails making a single

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payment for a contract of the stipulated sum. This is a basic financial contract in which the
contractors agree on a fixed amount for undertaking th construction project and the owner/
employer agrees to pay the agree upon lump sum once the works have been completed (Hugill,
2005). The Guaranteed Maximum Price Contract (GMP) refers to a contract type where the
contractor gets compensated for the costs they incur during construction, plus a fixed fee, which is
governed by a maximum ceiling price. Any cost overruns is the responsibility of the contractor
unless a formal change has been undertaken to increase the GMP. Any savings accrued from cost
under-runs or savings have to be returned to the project owner (Carmichael, 2000). The cost plus
fixed fee contract is a contract type in which the costs incurred by the contractor are reimbursed by
the project owner. It also includes a payment for the contractor which is negotiated as a fixed fee at
the start of the project. The fee remains fixed and does not vary in relation to the actual cost;
however, the contract fee can vary or be adjusted due to changes in the works to be undertaken
under the terms of the contract (Kelleher & Abernathy, 2010).
The criteria selected for doing the weighting are based on the unique circumstances of the
contract. The most important thing is the budget; the maximum amount that is available to
undertake the construction project. This is also given a high weight because it has a huge and direct
bearing on the entire financial contract; it cannot be exceeded. The possibility for adjustments is
also given a high weight because it dictates who will ultimately absorb the risk of adjustments in
contract sum. The delivery model is another criteria used to determine the financial contract type to
be used; the financial contract must be consistent, and complementary to the chosen project delivery
model. The structure of the project also has a bearing on the financial contract type; the M$
expansion project is very complex in terms of size, scope, and duration, as well as the number of
subcontractors. External factors and how can influence project cost is also an important criteria;

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factors such as inflation, weather and environmental factors, and unexpected incidentals can have a
significant impact on the project cost, and so it is also used as a criteria.
Based on the criteria and other factors, scores were assigned to the three different contract
types in reference to the project situation and inherent merits/ demerits of the different financial
contract types. Lump sum contract type gets a low score on influence of external factors, the project
structure, and the delivery model because these factors can change significantly. Further, the budget
gets a high score since it means the agreed amount is what will be paid (Chan et al., 2011). The
project structure also get a low score since it is to be done in phases and the budget is so huge that it
is not possible for the contractor to raise the amount of close to the total amount to undertake the
project to be paid after doing the works. For these reasons, the lump sum had the lowest weighted
score of 504. The GMP was also scored in relation to the criteria chosen. Possibility of adjustments
and external factors influence such as weather get very low scores since any adjustments will be
borne by the contractor (Chan et al., 2011, hence it gets a total weighted score of 602. For the cost
plus fee, the contract type is suitable for the contract delivery type and the criteria used for
assessment, and gets a high score of 780. The cost plus fee allows costs to be identified early and
the contractor has greater control and reduced risk from changes (Rodriguez2017)
Procurement method
The procurement method is also an important aspect of construction projects because it is
impacted by the type of financial contract, the project budget and delivery model; it must also be
consistent with the two aspects of construction. The procurement methods under consideration here
include Competitive, Negotiated and Best Value. Competitive procurement are procedures used to
develop procurement using bidding where would be supplies quote their prices and the most
competitive (lowest price for the highest value) is selected. This offers a fair chance to all players
while also enabling transparency. Best value procurement pertains to using other factors apart from
price, such as expertise and quality in selecting vendors. Negotiated procurement on the other hand
pertains to vendor selection without formal price competition or advertising and suppliers are
selected to the best advantage of government, though other factors such as price and quality are also
considered (Kelleher & Abernathy, 2010). to determine the best model, various criteria were
identified and weighted. The criteria used include assurances that quaity will be achieved and
competitive (lowest price) attained. The procurement model must also be suitable for the project
delivery and financing model, as well as reducing/ minimizing risk. These were computed in a table
as shown below;

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The scoring was doe based on the criteria and the project unique challenges and issues; the
competitive procurement had high scores in terms of assuring quality as the NSW intends the
project to act as a benchmark for future projects. Further, it has a high score for cost as it ensures
transparency and lowest price for the highest quality. Further, it minimizes risks such as failure to
deliver by suppliers because they are evaluated technically. The negotiated model scores very low
on cost and averagely on suitability for the delivery model and financial contract as well as on risk;
there is a risk that negotiations will not provide the best quality products. The best value model
scores highest on quality and minimized risk, but just above average on other criteria since the
project is complex and cost I a major factor that best value does not consider as a priority. Based on
these, the competitive procurement model, that just edges the best value procurement method, is
chosen as being the most suitable for the M4 road expansion project
Conclusion
Having reviewed the contract conditions and terms and unique circumstances, as well as
criteria for the project delivery model, financial contract type, and procurement; this paper
concludes that the best delivery model is design build; the most suitable financial contract type is
cost plus fee, and the most suitable procurement method is the competitive model.

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References
Carmichael, D. G. (2000). Contracts and international project management. Rotterdam: A.A.
Balkema.
Chan, Daniel W. M., Chan, Albert P. C., Lam, Tsun-ip Patrick, & Wong, James M. W. (2011). An
empirical survey of the motives and benefits of adopting guaranteed maximum price and
target cost contracts in construction. (International journal of project management, July
2011, v. 29, no. 5, p. 577-590.) Elsevier.
Chan, Daniel W. M., Chan, Albert P. C., Lam, Tsun-ip Patrick, Yeung, Fai-yip, & Chan, Joseph H.
L. (2011). Risk ranking and analysis in target cost contracts: empirical evidence from the
construction industry. (International journal of project management, Aug. 2011, v. 29, no. 6,
p. 751-763.) Elsevier.
Clough, R. H., Sears, G. A., Sears, S. K., Segner, R. O., & Rounds, J. L. (2015). Construction
contracting: A practical guide to company management. Hoboken, New Jersey : John Wiley
and Sons, Inc
Cushman, R. F. & Loulakis, M. C. (2016). Design-Build Contracting Handbook.New York; Wolters
Kluwer (Firm).
Edgerton, W. W. (2009). Recommended contract practices for underground construction. Littleton,
Colo: Society for Mining, Metallurgy, and Exploration.
Dey, P. K. (January 01, 2006). Integrated project evaluation and selection using multiple-attribute
decision-making technique. International Journal of Production Economics, 103, 1, 90-103.
Han, S. H. (June 01, 2007). Predicting Profit Performance for Selecting Candidate International
Construction Projects. Journal of Construction Engineering and Management, 133, 6, 425-
436.
Handfinger, A. P. (n.d.). Understanding Contractual Pricing Arrangements –Fixed Price, Cost-
Plus, and Guaranteed Maximum Price. Retrieved August 26, 2017, from
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Understanding_Contractual_Pricing_Arrangements.pdf
Hugill, D. (2005). Financial management in construction contracting. London: Blackwell
Publishing.
Kelleher, T. J., & Abernathy, T. E. (2010). Smith, Currie & Hancock's Federal government
construction contracts: A practical guide for the industry professional. Hoboken, N.J: John
Wiley & Sons.

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Rodriguez, J. (2017, April 27). Guide to Cost Plus Contracts Plus More Variations. Retrieved
August 26, 2017, from https://www.thebalance.com/all-about-cost-plus-contract-basics-plus-
4-more-options-844913
Warhoe, S. P. (2013). Applying earned value management to design-bid -build projects to assess
productivity disruption: A system dynamics approach. Doctoral Thesis; Skema Business
School.