An Overview of Construction Contracts
Choosing between construction contracts can be challenging when embarking on a construction project. The type of contract you draft will play a major role in your project, so it is important to choose the contract that best suits your needs. The construction contracts commonly available are:
- Lump Sum Construct Only
- Lump Sum Design & Construct
- Early Contractor Involvement Construct Only
- Early Contractor Involvement Design & Construct
Distinguishing Construction Contracts: Lump Sum v. Early Contractor Involvement (‘ECI’)
The first decision between the main types of contracts is whether you will need a lump sum contract or an ECI contract.
A lump sum contract is where the contractor performs an agreed scope of works for an agreed lump sum price. That is, a fixed amount. A lump sum contract may be appropriate where the design of the construction project has enough detail to allow the contractor to propose an appropriate lump sum price.
However, lump sum contracts can be problematic where the design remains relatively uncertain. So, if you need to start work before the design is sufficiently finished or you will like the builder to provide input on the design before it is finalised then a lump sum contract will likely not be the best option. A general rule is that the more uncertainty surrounding the direction of the project will increase the risk for the contractor, consequently, the higher their price is likely to be.
Therefore, lump sum contracting is suitable where the project is sufficiently straightforward and there is no urgency for a speedy completion.
ECI is a type of construction contract which engages the head contractor in the early stage for a fee that covers preliminaries, profit and overheads. Generally, the design has not been finalised so the actual cost of construction is unknown. ECI contracts are usually based on a ‘cost-plus’ arrangement. The initial fee is the ‘cost’.
The ‘plus’ refers to the amount owed to the contractor for third party costs such as subcontractors and consultant costs that will be engaged in the course of the project. With ECI contracts, there is more room for uncertainty because the construction costs are unknown at the outset.
ECI contracts are particularly advantageous for fast-tracking projects. For this reason, ECI contracting is suitable when time is an issue. Moreover, the ECI contracting process allows for greater flexibility than lump sum and includes a competitive tender process for the required works. Typically, such tenders are conducted on an open book basis.
How to decide between contracts
There are several considerations in deciding which of these contract types best suits your project. However, you should consider the following questions in making your decision:
- Will the contractor need to start work or place orders before the design is sufficiently finished?
- Do you want your builder to provide input on the design before it is finalised and the price is agreed?
- Would you prefer to retain control of the consultants throughout the project?
Will the contractor need to start work or place orders before the design is sufficiently finished?
If you need the contractor to start work or place orders before the design sufficiently finishes, then an ECI type contract may be your only option. There is a greater degree of uncertainty where the design remains incomplete. As mentioned, unlike lump sum contracts, ECI contracts allow for uncertainty around the final scope and price of the project.
Do you want your builder to provide input on the design before it is finalised and the price is agreed?
Generally, where the project involves complicated designs or complex construction elements then you may benefit from input from the builder before the design is finalised. Receiving input from a builder may also help better manage the project budget. If you will like/need input from the builder before the design and price finalises then an ECI contract is more suitable.
Under an ECI contract, contractors typically have an obligation to provide assistance in regards to the ‘constructability’ of the project. This means they must identify obstacles before a project is actually built to reduce or prevent errors, delays, and cost overruns. They are also required to assist in identifying potential changes to the design where savings may be possible. Moreover, the contractor is responsible for managing the design and coordinating the design team.
Would you prefer to retain control of the consultants throughout the project?
This question is dependent on your preference as a principal. Some principals prefer to remain in complete control of the design. This is to ensure that their design will not be compromised during the course of the project.
If this is the case, the principal should ensure their construction contract enables them to retain control of the consultants throughout the project. Alternatively, the head contractor will handle management of any consultants and subcontractors.
Undoubtedly, if you would prefer to retain control of the consultants throughout the project then a ‘construct only’ type of contract would be appropriate (regardless of whether it is a lump sum or ECI contract).
The Next Stage
After determining your preferred contracting method, the next step is to draft the contract. Some common contracts used in construction are:
- Lump Sum Construct Only: AS 4000 or AS 2124
- Lump Sum Design & Construct: AS 4902 or AS 4300
- Early Contractor Involvement Construct Only: AS 4916, modified AS 4000 or modified AS 2124
- Early Contractor Involvement Design & Construct: AS 4916, modified AS 4902 or modified AS 4300.
At this stage, you should engage with a construction lawyer to assist you in selecting and designing a contract.
If you would like to speak with our construction lawyers, just contact us via 1300 337 997 or by filling out the contact form.