When studying for the PMI Construction Professional (PMI-CP) exam, it’s crucial to understand how contract types and delivery methods impact the frequency of claims. The examination emphasizes on mastering the risk management tactics applicable in construction projects, and one key area where risk is a major concern is in contract management. Particularly, dispute-resolution processes related to contractual agreements often lead to project claims.
I. Contract Types
A contract is a vital document that legally binds two or more parties to perform certain actions. In a construction project, a contract can be between a project owner and contractor, contractor, and subcontractor, or contractor and vendor. The type of contract can heavily influence the likelihood of claims.
It’s essential to understand the different contract types and how each of them can influence the frequency of claims:
- Fixed-Price Contracts: The contractor must complete the job for a stated price irrespective of their costs. This type of contract places more financial risk on the contractor, potentially leading to more claims if unexpected costs emerge.
- Cost Plus Contracts: These contracts reimburse the contractor’s actual costs and pay a fixed fee or a percentage of costs as profit. As the client absorbs more risk, the likelihood for contractor claims may decrease.
- Time and Material Contracts: These are essentially open-ended contracts where the contractor is paid for all labor and materials plus a set profit amount. These can also result in fewer contractor claims since the client typically absorbs cost overruns.
Understanding the nature of these contracts, and the risk each party assumes, is critical. In PMI-CP, the candidate must be able to grasp the intricacies of these contract types, and devise effective risk management strategies to mitigate claim occurrence accordingly.
II. Delivery Methods
The project delivery method is the process by which a construction project is contracted for and delivered to the owner. Subject to the chosen delivery method, the frequency of claims can also greatly vary.
- Design-Bid-Build (DBB): The owner contracts separately with a designer and a general contractor. While it is the most traditional method, DBB methods can lead to an increase in claims due to design errors or omissions, since the constructor is not involved in the design phase.
- Design-Build (DB): The owner contracts with a single entity that provides both the design and construction. While DB can lower claim frequency owing to the contractor’s involvement from the early phases, speed of execution may come at the cost of design integrity, leading to potential claims.
- Construction Manager at Risk (CMAR): The owner contracts separately with a designer and a construction manager who takes the construction risk. It reduces the owner’s risk but can lead to claims if the CM’s guaranteed maximum price is exceeded.
The knowledge of these delivery methods would prove immensely beneficial in responding to the exam’s situational questions effectively.
Conclusion
In conclusion, an understanding of the impacts of contract types and delivery methods on the frequency of claims are critical risk management knowledge areas for the PMI-CP exam. Therefore, mastering these concepts, along with effective mitigation strategies and preventive measures, is crucial to earning this certification. Tailoring the right contract type and delivery method to each project’s specifics, such as its risk profile, budget, and timeline, can help manage claims and disputes minimizing impacts on the project.
Practice Test
True or False: A fixed-price contract type usually has a higher occurrences of claims than a Cost-reimbursable contract.
- True
- False
Answer: True.
Explanation: Fixed-price contracts carry more risk for the contractor, therefore, there may be more claims for unexpected costs, while Cost-reimbursable contracts shift some risks to the Owner.
Design-Bid-Build (DBB) is a delivery method that would result in fewer claims than Construction Manager at Risk (CMAR).
- True
- False
Answer: False.
Explanation: In DBB, the Contractor takes on more risk, thus claims are more likely to occur. CMAR optimizes risk distribution, resulting in potentially fewer claims.
True or False: The delivery method selected has no impact on the frequency of claims.
- True
- False
Answer: False.
Explanation: The selected delivery method can decisively influence the distribution of risk, thus impact the frequency of claims.
Single select: Which of the following contract types is likely to have the highest frequency of claims?
- A. Lump Sum Contracts
- B. Cost Plus Contracts
- C. Unit Price Contracts
- D. Guaranteed Maximum Price Contracts
Answer: A. Lump Sum Contracts.
Explanation: Lump sum contracts place more risk on the contractor, often resulting in higher claims frequency.
Multiple select: Which of the following would likely result in an increased frequency of claims?
- A. Poorly defined scope
- B. Price escalation clauses
- C. Seamless communication among parties
- D. Unsuitable contract type
Answer: A. Poorly defined scope, D. Unsuitable contract type.
Explanation: Both a poorly defined scope and an unsuitable contract type can cause misunderstandings leading to more claims.
True or False: In a cost-plus contract, a contractor’s claim occurrence could be relatively low because the owner absorbs cost overruns.
- True
- False
Answer: True.
Explanation: Cost-plus contracts shift the risk of cost overruns to the owner, thus reducing the number of contractor’s claims.
A well implemented Design-Build delivery method would result in a higher frequency of claims compared to a well implemented Construction Manager at Risk method.
- True
- False
Answer: False.
Explanation: With its single point responsibility feature, Design-Build can lead to fewer claims compared to CMAR.
Multiple select: Which are common reasons for an elevated frequency of claims?
- A. Inadequate contract administration
- B. Inaccurate site conditions
- C. Early contractor involvement in design
- D. Lack of experienced staff
Answer: A. Inadequate contract administration, B. Inaccurate site conditions, D. Lack of experienced staff.
Explanation: These options can cause miscommunications, misunderstandings, and mistakes which leads to an increase in claims.
Single select: Which delivery method often results in the least amount of claims?
- A. Design-Bid-Build
- B. Design-Build
- C. Engineering, Procurement, and Construction
- D. Integrated Project Delivery
Answer: D. Integrated Project Delivery.
Explanation: IPD encourages collaboration among all parties, thus reducing the likelihood of claims.
True or False: The type and delivery method of construction contracts can directly impact project budgets and timelines.
- True
- False
Answer: True.
Explanation: The selection of contract type and delivery method can impact the distribution of risks, and therefore, the frequency of claims, affecting budgets and timelines as well.
Interview Questions
What is the impact of selecting a lump-sum contract on the frequency of claims in a construction project?
Selecting a lump-sum contract may reduce the frequency of claims as the contractor agrees to complete the project for a fixed price, thus taking on the risk of cost overruns and adjustments.
How does a cost-plus contract type impact the frequency of claims in a construction project?
In a cost-plus contract, the frequency of claims can be high as contractors can always claim additional costs for project changes, unexpected conditions, or cost inflation.
In what way does a design-bid-build delivery method impact the frequency of claims?
In design-bid-build delivery method, claims are often higher due to the linear nature of project phases which may result in disputes arising from design errors, omissions, or delays.
How does a design-build delivery method affect the frequency of claims?
The design-build delivery method often results in fewer claims due to the single point of responsibility, which might reduce discrepancies and disputes over project design and construction.
What could be the impact of a negotiated contract on the frequency of claims in construction projects?
In a negotiated contract, the frequency of claims can be relatively low since both parties collaborate and agree on terms, reducing chances of disputes and claims.
How does the integration of the design and construction phases in the design-build delivery method reduce the frequency of claims?
Integration of design and construction reduces claims as it eliminates the usual finger-pointing between the designer and contractor over design errors or omissions, saving time and costs associated with dispute resolution.
In a unit price contract, how could the frequency of claims be impacted?
In a unit price contract, the frequency of claims can be high when there are changes in quantities of materials or changes in work scope.
How does the selection of the Construction Manager at Risk (CMAR) delivery method impact the frequency of claims?
The CMAR method usually leads to a lower frequency of claims because it encourages cooperation between the designer, contractor, and owner, reducing potential conflicts that may lead to claims.
How does Guaranteed Maximum Price (GMP) contract type impact the frequency of claims?
GMP contract limits the claims to the degree that any cost overrun beyond a set limit requires the contractor to absorb the additional cost, resulting in fewer claims.
How does the selection of Integrated Project Delivery (IPD) impact the frequency of claims in construction projects?
Selecting IPD may result in fewer claims because it fosters collaboration and shared risk among all project participants, reducing potential points of conflict.
Does the selection of a Time and Materials (T&M) contract impact the frequency of claims?
Yes, a T&M contract may increase the frequency of claims as costs are not capped and contractors may claim additional costs associated with extended timelines or extra materials.
How does the selection of a Design-Bid-Build delivery method affect the frequency of claims?
The Design-Bid-Build method may result in a higher frequency of claims due to the clear separation of design and construction responsibilities, which could lead to more disputes.
How does performance-based contracting impact the frequency of claims?
Performance-based contracts offer incentives for performance exceeding contractual requirements and penalties for underperformance, reducing the frequency of claims due to well-defined expectations.
How does a Fast-Track Construction delivery method impact the frequency of claims in a construction project?
The Fast-Track method could increase the frequency of claims due to insufficient design information and scope related disputes because design and construction phases progress concurrently.
How does a Target Cost Contract impact the frequency of claims?
Target Cost Contracts encourage the contractor to manage the project efficiently within the target cost, thereby decreasing the frequency of claims as cost overruns are partly borne by both the owner and the contractor.
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