An Overview of Construction Management Agreements
Construction management contracts are a staple of the industry, providing a reliable method of facilitating the sometimes thorny process of constructing a project. Or at least, they’re supposed to – like so many other types of contracts, well-written construction management contracts provide clear guidance on rights and obligations, as well as a pathway through potential disputes, to the parties who are involved.
Construction management contracts differ from the more common kinds of agreements within the construction realm (like the design and construction contract and the owner-builder agreement, for example) in that they serve generally as an expert body’s advice to the client owning the relevant project rather than being the actual deal made for the construction and coordination of the project . Under the construction management contract, the contractor, or the "construction manager," brings its expertise on board and manages the construction project not just as a one-off event but as the entire set of procedures involved in effective, clear management so that the ultimate end of the project is achieved.
The project in this situation is effectively the purpose of the contract, which defines how that purpose is to be achieved. In the end, the objective of the contracting process is to protect both the owner of the project and the construction manager, to ensure that the project is successfully moved through its significant phases without the deviation of resources or the difficulties of planning actively interfering with the general goal of completing the project.
The 8 Basic Components of a Construction Management Contract Template
A construction management contract template should include the essential elements of any construction management contract. And due to the number of projects they manage, managers are typically highly involved in the creation of templates for every facet of the construction management process. You can ask any construction management company and they will most likely have an extensive collection of construction management contract templates to choose from.
In order to manage a project efficiently and effectively, it’s important to have a very clear and detailed scope of work, timeline, budget, and responsibilities assigned.
Scope of Work
The scope of work (SOW) is the most important part of any construction management contract template. A SOW is simply a detailed list of what everything in the construction management contract covers. For example, if a construction management contract is covering a bathroom remodel, the SOW would detail everything from the amount of tile to be laid to the types of drawers going in the cabinets.
The depth of detail in an SOW can vary. While some construction management contracts have vague scopes of work with the understanding that the scope might change based on the results of the project, others are much more specific about not only the types of revisions that could occur but also how to handle those revisions at every step of the process.
Timeline
The second most important aspect of any construction management contract is the timeline. Generally, SOWs and timelines are used in tandem with budgets and responsibilities. For example, more time often results in a higher cost — so the provision of more time for a project can often mean more scale back on other parts of the project.
Budgets
The budget for a project needs to be very clear. Like timelines, budgets often have to be understood in terms of scope and responsibilities. For example, a budget that is more generous can mean a tighter timeline or fewer responsibilities for the contractors.
Responsibilities
This is where things can get tricky. While some contractors expect clients to manage day-to-day activities when there are multiple involved in a project, many design-build contractors will want to lay out every single responsibility, even if it might seem redundant. Construction management contracts with limited responsibility allocation can lead to major disputes that cannot be solved quickly or easily.
Advantages of a Contract Template
One of the core benefits of a comprehensive construction management contract template is that it can save you hours of time once it’s designed. In most states, the law doesn’t require managers to create a contract from scratch, so why waste hours going to all that trouble? With a template already drawn up, all you have to do is fill in the blanks.
Another key reason for using a contract is that it keeps you in line with state and federal laws. These laws bind managers to contractual obligations under different circumstances, and some even require a written contract (typically for projects over a certain value, such as $1,000 or $5,000). Having a contract doesn’t guarantee you will avoid trouble with the authorities; however, it does ensure you have the best paper trail possible.
Using a template also brings consistency and clarity to your projects. If you always use the same contract, your team knows what to expect, and you can quickly refer back to prior projects if necessary for help in dealing with issues as they come up.
Tips for Tailoring Your Construction Management Contract Template
The process of customizing a generic construction management contract template is crucial to the overall success of your project. It enables you to shape the agreement so that it takes into account the specific needs and expectations of all parties.
A carefully crafted agreement presented in the form of a template is eminently suitable as a basis for a contract between a construction manager and the other parties to a project. Nevertheless, one contract will never fit all. Once again, it is vital to get clear agreement on the process, payment structures, essential terms, and conditions of any template agreement with the other party or parties to the contract. Using specific terminology or terminology that is common to the parties may also help to ensure that there is no misunderstanding about the terms of a contract that has been agreed.
A construction manager can determine the best way to personalize and adapt an agreement for a specific project. The preferred method may vary depending on the size and scale of the project under consideration. For example, for larger projects it may be appropriate to negotiate stages for payment under the agreement and to attach a schedule to the agreement specifying and clarifying the individual stages. Moreover, it is recommended that specific percentages be included as a roadmap to identify milestones within the contract. The completion of each stage may be dependent on various specifications, such as the completion of a relevant report or the delivery of a product. In addition, the contents of such a report or product may be referenced in the contract.
If a project manager is using a preferred template for each project, it may be advisable to leave certain provisions blank and to choose and fill relevant provisions as the final contract is reviewed in detail by the other party. For example, references to facility requirements may be left blank on a basic template so that the particulars regarding the specific facility are left to be filled in at a later stage.
Anticipating the variations required to customize a generic construction management contract template will place the construction manager in an informed negotiating position, as those involved in the contract will be aware of the types of variations that could be appropriate to agree.
Common Mistakes to Watch Out For
Managing issues related to construction management contracts typically involves the following pitfalls:
Failing to customize: "One size fits all" doesn’t apply to construction management contracts. Each contract must be adjusted to the specifics of each construction project, including the interests of the owner and the construction manager. A project that is bid and privately funded will look much different than a project that falls under E-Verify requirements or is being financed through public funds.
Not using a licensed construction manager: Construction managers aren’t required to be licensed. This means it’s fairly common for some contractors who don’t have management experience to bid on projects as a management company to drive up their chances of winning the job. This can come back to bite owners if the manager doesn’t have the experience to oversee the project. Familiarizing yourself with an experience construction management team is the best method of ensuring you’re not stuck with poorly planned and executed construction.
Not addressing problems immediately: To get a construction contract revised , the signature of one side’s representative isn’t enough. The change must be signed on both ends before any revisions are considered valid. This means that timely resolution of change requests is key to avoid budget overruns.
It’s important to draft construction management contracts in a way that anticipates cost overruns and schedule delays. Contracts should clearly set forth the process for submitting change requests and how to go about amending the contract after minor changes.
Construction Contract Legal Issues
In addition to addressing the practical components of your construction contract, it is critical that the legal aspects are well covered so that you and your construction manager are appropriately protected should a project-related dispute arise. We recommend that you have legal counsel review the provisions of your construction contract template before relying on it, particularly for state-specific requirements that you may not be familiar with.
In this section, we identify some of the common legal concerns that you may need to address in your contract:
Dispute resolution – In both construction and zoning, the process of going through the local and/or state system of determining what can or cannot be built on a particular piece of land can be time-consuming. In general, a dispute should be resolved in the least costly and time-intensive manner possible. You may want to add a dispute resolution provision to your construction management contract template that limits disputes to arbitration rather than litigation.
Bonds – What type of bond should be required for your construction manager? Bonding requirements will vary based on industry standards, but bonds can also be used to protect you against nonperformance or warranty-related claims. A bond can be very useful for a performance bond because it is essentially insurance that if there is ever a claim, the bonding company can pay it for a contractor.
Limits of liability/insurance considerations – This section could be interpreted to the extent permitted by law, but in general you can limit the liability of your construction manager to two or three types of damages: direct damages, indirect damages, and consequential damages.
Final Thoughts: The Necessity of a Good Contract
The ability to read and understand the many different ways of allocating risk in the construction management contract helps to impress upon construction managers the need for a well-structured contract that clearly addresses the individual risks involved. This should not be just the generic contract, but shall be custom tailored to the unique relationship between the parties before any work is performed . At a minimum, the contracts shall clearly establish the project schedule, scope of work, payment terms, duties and responsibilities of all involved, methods of inspection, and notifications of delays. The construction manager should never feel that he is letting his client down when he requests language to be included that is properly drafted to his benefit and the benefit of the client. Further, once you have your template language properly formatted and are not starting from scratch with each agreement, you may end up saving some time and money for the project owner and the subcontractors.