Division 0 · November 21, 2023

Contracts! Design-Bid-Build Pros and Cons

House? Tower? Pool? You know what you want to build, but have you thought about the best contract type to execute the design and construction of your dream?  The contract type has a significant impact on the outcome for both the owner and the general contractor.  One common approach is the Design-Bid-Build, in which the owner hires consultants to design the building and then sends out a tender to contractors.  The contractors bid on the drawings for a fixed/stipulated price contract, which in Canada the standard stipulated price contract is a CCDC 2.  Today we dive into the benefits and drawbacks of a stipulated price contract for both the Owner and the Builder and I reveal some of my recommendations on approaching this contract style.

Benefits for the Owner:

• Cost Certainty: As long as the drawings are produced well, stipulated price contracts provide owners with a predictable budget, as the contractor is responsible for any non-drawing related cost overruns. This can be a significant advantage for owners who need to maintain tight control over their finances.

• Risk Transfer: The risk of unexpected construction expenses and delays is shifted from the owner to the contractor, making it easier for the owner to manage their project's financial aspects.

• Competitive Bidding: Stipulated price contracts often encourage competitive bidding, as contractors need to submit their most competitive pricing to secure the project. This can lead to cost savings for the owner.

• Full Control over Design: Owners have full control over the project's design, ensuring it aligns with their vision and requirements.  This allows for increase creativity for the owner and designers. 

 Drawbacks for the Owner:

• Limited Flexibility: Fixed price contracts are less flexible when it comes to making changes to the project's scope. Any modifications can result in additional costs for the owner.

• Design issues/mistakes: For any mistake on the drawings, contractors are entitled to change orders. These can end up being quite costly if the changes are not discovered early.  Some (non-ethical) general contractors working under fixed price contracts may purposely not raise design issues or concerns until the last possible minute. This strategy can be used to facilitate delay claims and request additional compensation, which can result in project delays and unforeseen costs for the owner. Effective project communication and dispute resolution mechanisms are vital to address such issues promptly and fairly.

• Quality vs. Cost: Some contractors may sacrifice quality to stay within the fixed budget, potentially compromising the overall project quality.

• Upfront Costs on Design with No Contractor Input: Owners must invest in comprehensive design work before the contractor's involvement, which can result in significant upfront costs and may not take advantage of the contractor's valuable input.

 Benefits for the General Contractor:

• Incentive for Efficiency: Fixed price contracts encourage general contractors to be efficient and manage their resources effectively to maximize their profits.

• Competitive Advantage: Winning fixed price projects can enhance a contractor's reputation and help secure future business opportunities.

• Risk Management: Contractors can minimize the risk of cost overruns by thorough project planning and efficient execution.

• Client Reporting: A contractors reporting requirements to the client are much less compared to a construction management contract style.  This allows the contractor to focus more time on project execution.

• Design responsibility: Or lack-there-of, allows the contractor to focus on building.

 Drawbacks for the General Contractor:

• Profit Exposure: If unexpected challenges or changes arise, the contractor may incur additional costs that were not accounted for in the fixed price, reducing their profit margin.

• Intense Competition: The competitive nature of fixed price bidding can lead to lower profit margins and increased pressure to deliver projects within budget.

• Project Uncertainty: Contractors may face financial difficulties if they encounter unforeseen issues that were not considered during the bidding process.

• Cash flow: One invoice held back may result in serious cash flow issues that can bankrupt a company if they have taken on more than they can chew.

• Subtrades walking from contracts: With the high rate of inflation since Covid, this has happened a lot more often in BC.

General Statements on Experience/Recommendations for Stipulated Price Contracts

In my experience, successful management of stipulated price contracts involves several key considerations:

1. Thorough Project Scheduling: Maintaining an up-to-date master schedule is paramount for stipulated price contracts. This schedule should clearly delineate the critical path and include task descriptions to help identify and convey any potential delays that could impact project completion.

2. Comprehensive Risk Management: General contractors must proactively identify and address potential risk factors unique to each project. Early planning for risk mitigation and the potential transference of risks to the relevant subcontractors are essential steps to prevent costly surprises and delays.

3. Cultivating Strong Client-Contractor Relationships: Building trust and collaboration between the client and the contractor is a vital aspect of any construction contract. Strengthening these relationships can be achieved through means such as:

   • Getting to know your clients and understanding their specific needs and expectations.

   • Ensuring transparency in your actions and decision-making processes.

   • Offering clear pathways to resolve issues that may arise, whether they pertain to design, unforeseen circumstances, or mistakes made during construction.

   • Encouraging open and honest conversations about any on-site problems or changes.

   • Demonstrating that your team is committed to delivering high-quality work while treating the client fairly when change requests occur.

4. Change Management Plan: Develop a clear change management plan to address unforeseen design issues promptly, with a focus on finding solutions and preventing costly delays or disputes.

5. Change Order Process: Develop a streamlined and efficient change order process to handle any modifications or scope changes that may arise during the project. This should include clear procedures for assessing costs and impacts on the schedule, as well as a method for obtaining client approval.

6. Detailed Contract Terms: Ensure that the stipulated price contract's terms and conditions are comprehensive and well-defined. Clarity in contract language can help prevent misunderstandings and disputes down the line. It is common to see supplemental conditions to the standard CCDC 2 contract.

Conclusion

Fixed price construction projects can be a double-edged sword, offering both benefits and drawbacks to owners and general contractors. While owners can enjoy cost certainty and risk transfer, they may face limited flexibility and higher costs for any design changes. Contractors, on the other hand, can improve efficiency and build their reputation but may struggle with tight profit margins and intense competition.

Ultimately, the choice of a fixed price contract, especially under frameworks like the CCDC 2 contract, should be made after careful consideration of the project's specific requirements and the risk appetite of both parties. Effective communication, thorough planning, and ongoing project management are crucial to ensuring the success of fixed price construction projects for all involved stakeholders.