In recent years, the number of ways of contracting construction work has multiplied, as have the types of builders. The intrusion suffered in the construction sector by real estate consultants, architects and decorators has generated a lot of confusion about the different types of contracts and the advantages and disadvantages of each one of them. With this post we try to shed some light on this issue, classifying the different construction contracts according to the benefits and risks assumed by the client.
THE INEVITABLE TRADE-OFF BETWEEN BENEFIT AND RISK
The different types of works contracts inevitably involve a risk-benefit ratio. A works contract that provides for the limitation of the constructor's functions and scope, or even the disappearance or division of the legal status of main contractor, will necessarily involve the assumption of greater risk by the promoter.
The economic risks that a developer may be unknowingly taking on are:
- Measurement variations
- Unit price variations
- Assumption of indirect costs
- Correction of deficiencies and finishing touches
- Deadline extensions
- Claiming payments from subcontractors
- Working relationship with site workers
On the other hand, some contracts provide for the disappearance of the main contractor or its division into several main contractors. In such cases, the developer may be taking over the functions of the builder and his risks without knowing it.
The different types of contract, in order of lowest to highest risk for the promoter, are as follows:
The turnkey contract usually covers the drafting of the project, the project management, the processing of the corresponding licences and the execution of the work. Therefore, the builder is responsible for measurement variations, unit price variations and any defects in the project. Likewise, the builder is responsible for any defects in the execution, the finishing touches and penalties for non-compliance with the deadline.
Given the risk assumed by the builder, the builder usually passes on a higher margin in the price in order to absorb any deviations that may occur.
This type of contract is recommended for small, uncomplicated projects (e.g., for the implementation and refurbishment of offices). It is also recommended for works in which the promoter cannot assume any deviation in the budget due to a related operation (for example, a lease contract for the property that is the object of the work) or a closed budget allocation for the work.
In this case, the builder does not assume the deficiencies of the project but does assume the variations in measurement and unit prices. This type of contract is recommended in works where the project is very detailed and it is easy to measure accurately, otherwise it could lead to unfair situations for any of the parties.
OPEN MEASUREMENT CONTRACT
In this type of contract, the builder assumes the variation of unit prices but not measurement deviations or defects in the project, certifying what has actually been executed. This reduces the builder's uncertainty, which allows him to adjust his margin and, therefore, prices.
It is the most common type of contract as it is the fairest for both parties. It is also recommended when it is not possible to know the true scope of the work at the design stage (e.g. building renovation works).
OPEN BOOK OR MANAGEMENT CONTRACT
In an open-book contract or by administration, the builder presents the client with a comparative of each of the chapters with the budgets of the different subcontractors invited to the tender. Client and builder decide on the award of each job, with the latter providing the technical personnel who make up the site management and all the auxiliary means necessary for the proper execution of the items offered. On a monthly basis, the builder passes on to the client the direct and indirect costs accrued up to that time plus a fixed percentage of industrial profit.
In this type of contract, it is the client who assumes project defects and variations in measurement and unit prices. In other words, the builder acts in this case as the manager, with the developer assuming the entire economic risk. However, the legal status of the builder is clearly defined, so that the developer does not assume his legal functions, obligations and responsibilities.
Since in this case the builder's risk is reduced, so is his margin and, therefore, the price of the work. It is therefore advisable in projects where the developer is a professional, has construction knowledge and can assume risks in exchange for contracting at a lower price.
This contract is similar to the previous one but, in this case, there is no single main contractor. The works manager, wrongly called Project Manager, carries out the work of the constructor and the project management, but without assuming their responsibilities. There is not one main contractor, but as many as there are lots on the site. Each subcontractor must provide its auxiliary resources, preventive resources, site manager, etc., multiplying the total indirect costs of the work and, therefore, the contracting price.
In addition to the price, it is important to keep an eye on this type of contract:
- Responsibilities assumed by the developer. In the absence of a single main contractor, the developer may be unknowingly assuming this responsibility, including the part corresponding to health and safety and occupational risk prevention incidents.
- Coordination of works. There are as many site managers as there are lots or subcontractors on the site, which makes it difficult to coordinate all the work and increases the likelihood of execution errors.
- Responsibility for execution errors or budget variations. In this type of work, the roles and responsibilities of each of the actors involved should be clearly established, otherwise the developer will end up assuming the responsibility for errors and deviations at his own expense.
At Antana Construcción we adapt to the contracting system our clients prefer, making sure they are aware of the risks and benefits of each one of them.