Construction Management Contracts: Beware of “Homemade Contracts”

Construction-management contracts offer several advantages over the traditional “contract of enterprise”: the client and its professionals benefit from the general contractor’s expertise during the pre-construction stage, the work can be fast-tracked, the parties can avoid the BSDQ¹ in certain cases, etc.

That having been said, it is increasingly evident that many project owners and general contractors are using “homemade contracts” that lack the level of clarity and precision necessary to adequately define the parties’ respective rights and obligations, which unfortunately gives rise to an increased risk of strained relations on the worksite and, ultimately, litigation.

Here are some things to bear in mind when negotiating construction-management contracts.

1. Type of management

Should you use a contract “for services” or a contract “for services and construction”? This will have a determinative effect on the risks the manager is exposed to, the applicability of the BSDQ, holdbacks, potential conflicts of interest, liability issues, etc.

What it comes down to is whether will the work be performed by the manager’s sub-contractors or by specialized contractors hired directly by the project owner.

If the contract is “for services” only, who will assume the role of certification agent for payments – the professionals or the manager?

2. Identification of services

Does the contract clearly define what “pre-construction”, “construction” and “post-construction” services are? These definitions should be accompanied by a designation of the person who is to be responsible for each service (project owner, professional, or the manager) and the latter’s mode of remuneration (hourly rate, part of the all-inclusive fee amount, included in the administrative percentage, etc.).

3. Mode of remuneration

If you opt, in whole or in part, for a cost-plus contract, does the latter clearly define what the “plus” percentage applies to (% of the estimate, % of the cost of the work, % of the construction cost) and identify what is included in and excluded from the definitions?

Have you adequately identified what falls into the category of “refundable costs”? Will a profit percentage be applicable to those costs?

Conclusion

These are only some of the many factors to be considered when negotiating a construction-management contract. Whether they are “homemade” or standardized, construction-management contracts can have decided advantages over traditional contracts of enterprise, but their effectiveness requires a thorough understanding of the options available to the parties and the issues and risks involved, plus the ability to adequately address them in the wording of the contract, in order to minimize risks of conflict and litigation.