Fifty years ago, most construction projects were run by a conventional general contractor. The lowest responsible bidder got the job. Much of the work was done by crews on the payroll of the general contractor. The remainder was done by contractor specialists (subcontractors) working under agreements with the general contractor. Invoices drifted up the chain of contractors to the owner, and money flowed down the same chain from the owner or lender to subcontractors and suppliers. The prime contractor ran the show, handling invoices, claims, disputes, payments, change orders and requests.
General contracting as it was practiced 50 years ago hasn’t vanished. But today, numerous projects, especially the more complex ones, are handled by construction companies that do little or none of the actual construction. Construction management has become a “specialty,” with its own set of rules, standards and qualifications.
Why Owners Choose Construction Managers
Most property owners know very little about design and construction: finding qualified design personnel, preparing bid documents, researching potential contractors, evaluating bids, responding to change orders or requests for information. Very few property owners want to manage the day-to-day operation of a construction project.
A construction manager is the owner’s representative – answering only to the owner. The primary role of that manager is to protect the owner against excessive cost, delay, poor craftsmanship and unnecessary risk. Everyone else on the construction site has a different agenda.
Who uses a construction manager?
Construction managers are used by state and local governments. Many of the largest projects undertaken by the Corps of Engineers are now done with construction managers. Most commercial and industrial jobs are also done by construction managers. Some of the most experienced, most successful, most respected construction professionals we know fit the definition of construction manager.
For example, we know a contractor in Malibu who makes a very good living doing commercial and high-end residential work. His clientele is very comfortable dealing with consultants – lawyers, accountants, financial advisors, etc. In their eyes, he’s just another consultant, a construction consultant. This contractor gets involved early in the project, before design has started. He recommends an architect and an engineer, gets owner approval of the plans, guarantees a maximum price, selects trade contractors, ensures project completion to the owner’s satisfaction, and usually collects a nice bonus for completing work on time and under budget. He’s not a general contractor, he’s what is now called a construction manager.
A construction management contract is an agreement to pay for consulting services. The construction manager oversees project development in exchange for a fee. The project owner, not the construction manager, signs agreements with trade contractors. The construction manager may advise on pre-construction issues such as design and cost control, and will make recommendations on contract awards, coordination of trades, purchase of materials, payment of trade contractors, scheduling, and project closeout.
The job description for a CM contractor will usually include:
• reviewing the plans and specs
• preparing bid packages and evaluating bids
• checking insurance coverage
• approving the proposed contracts
• communicating with contractors and suppliers
• monitoring day-to-day construction
• keeping the owner informed of progress
• approving invoices
• assisting with change orders
• protecting the owner from construction claims
• directing project closeout
As you read down this list, you may figure out that this is what you’re currently doing as a contractor. In fact, that’s what every general contractor does. What a CM contractor doesn’t do may better define the work.
What's NOT included in a construction manager’s portfolio? A CM contractor earns a fee for consulting services -- period. The CM doesn’t buy or install materials. A CM has no contracts with the trades and pays no bills. The owner signs agreements with trade contractors, pays the bills, and holds installing contractors responsible for their work.
A CM contractor earns a fee as a consultant, the same as any architect or engineer. That fee could be a set amount for the job or a set amount per month, week or hour. Or it could be a percentage of the job cost. Or the fee could be based on performance – often called CM at risk contracting.
CM contracts are very different from traditional prime contracts, and have to be drawn carefully to avoid problems with property owners, trade contractors, suppliers and state regulators. Because CM contracting is so different from traditional general contracting, it’s easy for others to be confused. That’s why a construction management contract is so important.
When you do CM work for a public agency, that agency will almost certainly prepare the contract for you. Your only responsibility may be to sign the agreement. If you build or remodel offices or commercial buildings, or handle industrial projects, you’ll usually have the opportunity to offer a CM contract as part of the negotiating process.
A good CM contract will avoid or minimize nearly all the problems associated with traditional general contracting: risk of loss, disputes, excessive regulation, employee-employer issues, warranty claims, change orders and callbacks.
Recommending vs. Giving Orders
If you’ve been working as a traditional general contractor, you may not feel comfortable on your first CM job. A general contractor gives instructions to subs and suppliers and expects those instructions to be followed. A general contractor usually has written agreements with subs and can enforce penalties against subs who don’t comply.. In the case of a CM (consulting) contract, only the owner has written agreements with trade contractors – usually many agreements. On a multi-prime CM project, the trade contractors are usually recruited by the CM contractor, are almost certainly approved by the CM contractor, and will work closely with the CM during construction. But these trade contractors are legally responsible only to the owner. The CM can recommend and encourage. But the owner does the deciding.
Obviously, this difference in construction management contracting cuts both ways. True, the CM’s authority is limited. That’s bad, at least from the CM’s perspective, but the upside is that the CM isn’t legally responsible for failure of a trade contractor to perform. Of course, a CM gets a black eye when there’s trouble with a trade contractor. But there’s no legal liability. The CM doesn’t have to make good on a trade contractor’s mistakes.
A Construction Manager’s Fee
Traditional construction contracting came in two flavors – either (1) fixed price or (2) time and materials (cost-plus). CM contractors have many more choices, from simple to complex. First, the simple:
Lump Sum. The CM’s fee is a set amount -- no matter how much time is required and no matter how long the job lasts. This fee plan will work best on a small job that’s likely to be completed in a month or two. If the job will last many months, there will be an issue of how much is due on each statement date. A CM contractor has a financial incentive to front-load charges (larger payments at first). But, of course, an owner will prefer back-loaded charges (higher payments due on completion).
Weekly or Monthly Charge. If the job lasts 40 weeks and the rate is $2,500 per week, the total charge would be 40 times $2,500, or $100,000. Whether paid by the week or month, have a clear understanding about pro-rating any month or week before work starts, after work ends, and during periods when work stops. Your fee agreement should identify what happens during an extended delay. The advantages: Compensation on a weekly or monthly basis will be a good choice when a CM contractor works substantially full-time on a single job from start to completion. This is very similar to working on salary as an employee. The disadvantages: Not every job needs a full-time CM. On a smaller job, the CM may be required only a few hours a week. Again, there’s no incentive to complete work on time or within budget.
Percentage of Construction Cost. This is where fee agreements begin to get more complex. Selecting the percentage is the easy part: Five to 10 percent is common on a smaller job; on a large job, such as an airport or power plant, the CM contractor’s fee could be as little as one or two percent. When a CM contract is offered for public bid, CM contractors may compete on the basis of their percentage. The contract will usually be awarded to the CM contractor with the lowest percentage bid.
No matter what the percentage, it’s important to identify precisely what’s included in the definition of “construction cost.” The list of what’s included and what’s excluded should be very complete – resolving every possible issue for each of the four cost categories:
4. subcontracted services
Usually, the CM contractor’s fee will be a percentage of all four cost categories. But CM contracts routinely exclude the following from the definition of construction cost:
• compensation of design and engineering professionals
• the cost of buying or owning land or rights-of-way
• financing costs
• legal fees
• court costs or the cost of arbitration
• charges imposed by government authority on the owner of the construction site
• the fee of the CM contractor
The CM contractor usually sends an invoice at the end of each pay period based on payments made to contractors and suppliers during that pay period. The most common pay period is monthly.
One word of caution. Any time the CM contractor’s fee is based on the construction cost, the CM contractor must have the right to audit the owner’s cost records. The CM contractor won't necessarily see all invoices for work done and materials supplied. To be sure all costs are considered when calculating the fee, the CM contractor needs the right to inspect and copy the record of construction costs paid by the owner.
Guaranteed Maximum Price. Up to this point in our discussion of CM fees, we’ve considered only the consulting fee -- we haven’t considered the construction cost. But any of the fee agreements considered so far (lump sum, weekly, monthly or percent of job cost) could include a guaranteed maximum price. This is usually called an at risk CM contract or CM@R. The maximum cost to the owner (excluding change orders) is set by contract.
The construction manager shares in any savings if costs are less than the GMP; but he may have to pay some portion of the difference if there’s a cost over-run. For example, if the division is 80-20, the CM contractor would receive 20 percent of any savings below the GMP. The same split could be used to share in any cost over-run (the owner might pay 80 percent and the CM contractor might have to contribute 20 percent). Obviously, the CM has a heavy financial incentive to deliver the completed project for less than the GMP.
Construction manager at risk contracting is a potential win-win-win for most contractors. First, because it’s a CM contract, which means that most of the general contractor’s worst headaches are shifted to the owner: disputes about payment, liens, warranty, contractor claims, change orders, code compliance, etc. are the owner’s responsibility. Second, because it’s a CM contract, you’re going to get paid for your time. Your fee is guaranteed. Third, even though it’s a consulting contract, you can earn more than the consulting fee.
On Your Way to CM? If you’re like most construction contractors, what you do best and what you enjoy most is bringing the parts together to create something of value. What you’d definitely like to avoid are the headaches.
If you’re looking for a better way to make a living in construction – a way that makes good use of what you know already – consider the advantages of construction management contracting.
This article courtesy of Gary W. Moselle, a California attorney specializing in state-specific construction contracts. Gary has written a state-specific contract writing software program called Construction Contract Writer, and maintains a blog on construction contract law at: http://garywmoselle.blogspot.com
Disclaimer: Nothing in this article should be interpreted as a substitute for professional advice from an attorney practicing in your community. Only local counsel can appreciate the business and legal environment under which a construction contract is drafted, negotiated and executed.