Construction Contract
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​The type of construction contract you should use with your general contractor depends on several factors. Most commercial construction contracts are either stipulated sum, or cost of the work with a guaranteed maximum price (GMP). Those two contract forms are what I will exclusively discuss on this page.
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Use AIA Contracts
Most owners and contractors use the American Institute of Architects (AIA) A101 Stipulated Sum or A102 GMP contract forms. Developers and contractors like to use the AIA standard contracts because they are familiar and widely used in the industry. Someone who is experienced with the A101 or A102 can easily review one of those contracts in about 30 minutes or less. If you don't use an AIA form, the developer and GC have to be a lot more diligent in their contract review. This can bogged down review time, slow down contract negotiation and execution, and cause delay to the start of your project.
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To facilitate quick and easy contract review, the software that AIA uses to create contracts can show what modifications were made to the standard generic contract so that an owner and contractor can quickly and easily see what changes the other party made.
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Stipulated Sum (sometimes called Lump Sum)
​The AIA A101 is a simple, short and straight forward contract. An owner should use it if they have a non-complex project with completed plans (at least 90% Construction Document level) and you want to competitively bid the construction amongst several GCs. With this contract form, you want your plans to be fully complete or nearly complete. If the plans are something less than the 50% CD level, the bidding GCs may see a scope gap in the plans and might give you a low initial bid to win the contract, knowing they will be able to change order you later because of the scope gap in the plans.
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These contract forms are usually more risky for the GC because if they don't include something in their price that is documented in the plans or specs, they have to eat the cost of that missed item. They also have to eat any cost escalations. The benefit of this contract form for the GC is that they get to keep 100% of any project savings.
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Cost of the Work Plus a Fee with Guaranteed Maximum Price
​With this contract form, the GC is agreeing to do the work for whatever the work costs, plus the GC's fee, but he is willing to cap the overall cost to give the owner early certainty on the construction pricing. To find out what the work will cost, the GC will typically get multiple competing bids from each subcontractor trade, and add in the GC's general conditions and general requirements. To get to the guaranteed maximum price cap, the GC will then add in his fee and a GC controlled contingency dollar amount for unforeseen conditions and any items he missed during the bidding process.
The A102 GMP contract is good for complex and/or big projects where you want to bring in a GC early to assist and consult with the architect and engineers during the design process. Having the GC on board early, and advising on material costs, constructability, and lead times will theoretically result in a lower construction cost. The GC can also provide estimated pricing throughout the design process to ensure the designed building does not go over your construction budget. Finally, the GC will be able to start with dirt work and possibly even building foundations before the building design work is complete, allowing you to start the project faster.
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However, just because you have a GMP doesn't mean the owner paid construction costs wont go over the GMP amount. If there are errors and/or omissions in the plans, or adverse conditions that the GC could not have reasonably foreseen, the GC is entitle to give the owner a change order to pay for these problems. And those change orders could easily add up at the end of the project to take the final construction cost over the GMP amount.
With this form of contract, the owner and contractor usually split any savings below the GMP amount. Owners usually give the GC a share of the savings to incentivize him to save money. It is typical to give the GC 20 - 30% of the savings, with the owner keeping 70 - 80%.
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Exhibit A, Insurance and Bonds
Exhibit A is a standard exhibit to the A101 and A102, which specifies the insurance and any bonding your GC will provide, to include: general liability, automobile liability, employer's liability, umbrella, builder's risk insurance, payment bond, and performance bond. Be sure to get any minimum coverage limits required by your bank and share those with your GC so that he can provide the appropriate coverage, and certificate of insurance.
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Weather Days.
Ensure that the appropriate amount of weather days are incorporated into the GCs construction schedule to establish the contractual completion date. The GC should be looking at the historical rain days for an area, and factor in the time of year he will be doing construction until the building is dried in. Only allow a GC to count a weather day if the adverse weather affected a construction task on the GC's schedule critical path. If it rains when the GC is doing interiors work, that does not count as a weather day.
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Liquidated Damages.
Liquidated damages (LDs) are a daily fine your GC has to pay the owner for every day the GC delivers substantial completion of the project after the substantial completion date listed in the contract. I like to stairstep the LDs so that they are a low nominal amount at first, but grow in significance the later the GC is with delivery. For example, I might charge $100/day for the 1st seven days late, $500/day for the 2nd seven days late, $2,000/day for the 3rd seven days late, etc.
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Retainage
Most owners make retainage 10%. But it's good to add a clause that that owner can unilaterally consider lowering it to 5% at the 50% construction completion phase. An owner wants to hold retainage to lower his risk, but at 50% construction completing phase, the owner's risk is lowered, so it makes sense to release more retainage. However, releasing more retainage means you are deploying more capital, which will increase your construction period interest.
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Schedule
Ensure the GC includes the project schedule as an exhibit to the contract, and that the substantial completion date on the schedule matches the substantial completion date in the contract.
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Enumeration of Contract Documents
Since there might be several sets of plans the architect issues (issue for bid, issue for permit, issue for construction, 50% CDs, etc), make sure the correct set of drawings and specifications, that the GMP or lump sum price was based off of, is enumerated in the contract. This enumeration will list every plan sheet, and the date that sheet was issued or revised.
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Schedule of Value
The schedule of values is a line item breakdown of the different trades and costs of a project. The schedule of values is not organically listed as a required exhibit to the A102, but it is a good idea to have the GC provide the schedule of values as an exhibit to the contract. This gives the owner more clarity on all of the costs of the project. Also, the pay application schedule of values, shown in the AIA G703, should match the schedule of values in the contract.
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Bid Clarifications/Assumption/Qualifications
Your GC will also probably want to include an exhibit that clarifies their assumptions about unknow or poorly defined items in the bid or contract documents. There are usually a lot of ambiguities, errors, and omissions in a set of bid plans so it is good that the GC creates this exhibit so that the development manager can see all of the GC's assumptions. This document helps to point out potential gaps in scope that might result in a change order later.
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It is good to have your design team review the GC's clarifications, assumptions and qualifications to see if they pick up on anything that is not aligned with their design intent or might be a potential problem or cost for the project down the line.
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