Selecting the right project delivery method and contract structure is an essential part of effective project management. It is particularly important for senior stakeholders to understand these elements to choose the best approach that suits the project’s requirements. Let’s delve into this topic in conjunction with the PMI Construction Professional (PMI-CP) exam.
1. Project Delivery Methods
A project delivery method is a system used to organize and finance design, construction, operations, and maintenance services for a structure or facility by entering legal agreements with contractors, consultants, organizations, and property owners.
Three traditional delivery methods are commonly used:
- Design-Bid-Build (DBB)
- Design-Build (DB)
- Construction-Manager-at-Risk (CMR)
1.1 Design-Bid-Build (DBB)
In this conventional project delivery method, design and construction are clearly separated. The client first engages an architect or engineer to complete the design phase. Following plans preparation, the project is put out to bid. The general contractor then steps in to oversee the construction.
1.2 Design-Build (DB)
In the design-build delivery method, both design and construction services are streamlined through one single contract with the project owner. This method can fast-track work, as construction can commence before the design phase is entirely complete.
1.3 Construction-Manager-at-Risk (CMR)
In this method, the construction manager acts as the consultant during the design phase and the general contractor during construction. The owner contracts with the CMR for a guaranteed maximum price, which shifts a significant amount of risk from the owner to the CMR.
2. Contract Structure
Contracts are a critical element of any construction project. They outline the scope of work, pricing, and terms and conditions.
Commonly used contracts in construction are:
- Lump Sum or Fixed Price Contract
- Cost Plus Contract
- Time and Material Contracts
2.1 Lump Sum or Fixed Price Contract
It is one of the most common contract types. Under this form, the contractor agrees to carry out the work for a pre-defined fixed price. This contract type transfers significant risk to the contractor because prices are locked at contract signing.
2.2 Cost Plus Contract
In a cost-plus contract, the client agrees to cover the actual costs, purchases, and other expenses generated directly from the construction activity. This can include labor costs, materials, equipment, and more. The contractor then receives an additional fee, which can be a fixed amount or a percentage of the costs.
2.3 Time and Material Contracts
A time and material contract is generally used in projects where it is not feasible to estimate the total project cost in advance. It ensures that the contractor is paid for every hour worked plus reimbursement for all purchases made for the construction.
3. The Right Choice for Your Project
In choosing the appropriate project delivery method and contract type, several factors need to be considered such as the project’s complexity, project scope, risk allocation, and the project timeline among others.
In the PMI-CP exam, questions could be related to these delivery methods and contract types, as well as how best to advise stakeholders based on these circumstances. Practice examples to understand how to pair the right method and contract based on varying scenarios – this exercise is beneficial for the exam and your real-world experiences in construction project management.
Every construction project comes with its unique set of circumstances – there isn’t a ‘one-size-fits-all’ solution for project delivery method or the contract type. Leveraging knowledge and experience while analyzing these factors accurately can guide you and your team toward the most successful path for your project.
Whether you’re preparing for the PMI-CP exam or looking to refine your project management skills, understanding project delivery methods and contract types will arm you with the framework to make informed decisions on project strategies and execution. It will enhance your ability to effectively manage risks and successfully deliver projects.
Practice Test
True or False: The selection of the delivery method and contract structure can impact the risks, costs, and timeline of a project.
- True
- False
Answer: True
Explanation: The selection of delivery method and contract structure can significantly influence how project risks are shared, how costs are calculated, and the project schedule. They can also determine the roles and responsibilities of the project team.
When selecting a delivery method, which of the following factors should be considered?
- a) Complexity and size of the project
- b) Project timeline
- c) Project budget
- d) All of the above
Answer: d) All of the above
Explanation: The selection of a delivery method should consider multiple factors, including the size and complexity of the project, the timeline, and the budget.
Which is a type of construction contract structure where the owner carries the project risk?
- a) Lump sum
- b) Cost plus
- c) Guaranteed maximum price
- d) Unit price
Answer: a) Lump sum
Explanation: In a lump sum contract, the contractor agrees to complete the project for a fixed, lump-sum price, which means the owner carries the risk if the project exceeds that agreed amount.
True or False: The design-bid-build method is a project delivery method where the project owner hires a single entity to manage both design and construction.
- True
- False
Answer: False
Explanation: The Design-Bid-Build is a traditional project delivery method where the design and construction are handled by separate entities. In contrast, the design-build method involves one entity managing both design and construction.
Which delivery method typically results in the fastest project completion?
- a) Design-Bid-Build
- b) Design-Build
- c) Construction Manager at Risk
- d) Integrated Project Delivery
Answer: b) Design-Build
Explanation: In the design-build delivery method, design and construction overlap, which can significantly speed up the project timeline.
In what type of contract structure does the contractor get paid based on the actual costs of labor and materials plus a fee?
- a) Lump Sum
- b) Cost Plus
- c) Guaranteed Maximum Price
- d) Time and Materials
Answer: b) Cost Plus
Explanation: In a Cost Plus contract, the owner agrees to cover the actual costs of the project and also provides a fee to the contractor, typically as a percentage of the project’s cost.
True or False: In a time and materials contract, the owner assumes the risk of costs exceeding the budget.
- True
- False
Answer: True
Explanation: In a time and materials contract, the contractor is paid based on the actual cost of labor and materials, meaning the owner assumes the risk of costs exceeding the budget.
The Construction Manager at Risk delivery method is:
- a) Single contracted
- b) Dual contracted
- c) Multi contracted
- d) Not contracted
Answer: b) Dual contracted
Explanation: The Construction Manager at Risk method involves two separate contracts – one with the designer and one with the construction manager – hence it’s considered a dual contracted delivery method.
Choosing the right contract structure depends on:
- a) The risk tolerance of the owner
- b) The project schedule
- c) The complexity of the project
- d) All of the above
Answer: d) All of the above
Explanation: The selection of the right contract structure should take into account several factors, including the risk tolerance of the owner, the project schedule, and the complexity of the project.
True or False: An Integrated Project Delivery method involves collaboration between the owner, architect, and contractor from the beginning stages of the project.
- True
- False
Answer: True
Explanation: An Integrated Project Delivery facilitates collaboration between all key stakeholders from the outset, which can result in more efficient and effective project execution.
Interview Questions
What is a construction delivery method?
A construction delivery method is the comprehensive process used to take the project from its initial concept to its final completion. It includes design, planning, and construction processes.
What are the primary considerations while advising senior stakeholders on the selection of a construction delivery method?
The primary considerations should include the project’s scope, budget, timeline, quality requirements, risk allocation, and the level of control required by the owner/client.
Why is it crucial to choose an appropriate contract structure for a construction project?
An appropriate contract structure is crucial for defining the roles and responsibilities of parties, managing risks, and ensuring the smooth implementation and completion of the project. It also affects the project’s cost, quality, and time aspects.
What is a Design-Bid-Build (DBB) delivery method?
In the Design-Bid-Build delivery method, the owner contracts separately with a design team and a construction team. The design team completes the design before contractors bid on the construction work. The lowest bidder is usually awarded the project.
When is the Construction Manager at Risk (CMAR) delivery method advisable?
The CMAR method is advisable when the owner wants the contractor to assume the risk of adhering to the project’s budget and schedule. The construction manager is involved early in the design process, providing cost estimates and scheduling input.
How can a Design and Build delivery method be beneficial?
The Design and Build delivery method can be beneficial as it provides the owner with a single point of contact for design and construction. It can potentially streamline the process and reduce change orders.
What is a lump sum contract in construction?
A lump sum contract is a type of construction contract where the contractor agrees to complete the project for a fixed price. It provides a high level of cost certainty for the owner but places the risk of cost overruns on the contractor.
When is it advisable to use a cost-plus contract?
A cost-plus contract is advisable for projects where the scope is not fully defined at the outset, and there is room for changes during the construction phase. It provides for the payment of actual costs, purchases or other expenses directly related to the construction activity.
What are the risks associated with the selection of inappropriate delivery method or contract structure?
Risks can include project delays, cost overruns, litigation, substandard work quality, and potential failure of the project.
How can senior stakeholders mitigate risks associated with delivery methods and contract structures?
Senior stakeholders can mitigate risks by thorough planning, defining clear roles and responsibilities, keeping open communication lines, and regularly reviewing and updating risk mitigation strategies. It is also essential to adapt the delivery method and contract structure to the project’s specific needs.
What are the key factors to consider in making the decision between a lump sum and a cost-plus contract?
Key factors include the project’s scope clarity, the owner’s risk tolerance, and the need for cost certainty. In general, a lump sum contract provides more cost certainty but less flexibility, while a cost-plus contract allows for changes but with less cost control.
Before recommending a project delivery method, what should you ensure as a PMI Construction Professional?
As a PMI Construction Professional, you should ensure that you have a full understanding of the project’s requirements, stakeholder expectations, available resources, and an assessment of potential project risks.
What role does a good contract play in the project’s success?
A good contract establishes clear expectations, fosters collaboration, motivates performance, manages risks, and provides mechanisms for dispute resolution. It forms a foundation for the successful delivery of the project.
Can one delivery method or contract structure fit all types of construction projects?
No, the best delivery method or contract structure depends on the specifics of each project. Factors to consider include project complexity, timeline, budget, and owner’s desire for control.
Is it possible to change the construction delivery method or contract structure once the project has started?
It’s possible but usually not advisable as it can lead to legal issues, time delays, and additional costs. Any potential changes should be reviewed with legal counsel and must be agreed upon by all parties involved.
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