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Construction Contract Fundamentals
Baker Tilly refers to Baker Tilly Virchow Krause, LLP,an independently owned and managed member of Baker Tilly International. 2010 Baker Tilly Virchow Krause, LLP
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About Baker Tilly
> Established in 1931
>
the United States*
According to Accounting Todays 2011 list of
.
> More than 1,300 professionals
> Baker Tilly Virchow Krause, LLP is the largest. . a er y n erna ona n epen en
member firm
> Baker Tilly International is the eighth largestpublic accounting network with representationin more than 110 countries
> Convenient, seamless resource for worldwide
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needs
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About Baker Tilly
concep un ng con ro s compliance, Baker Tilly has more than 250 dedicatedconstruction and real estate industry professionals to
assist with your facility development project throughall stages of the development lifecycle.
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Introductions
Tony Ollmann Erik Schuchardt
CCA, Director CPA, Manager608 240 2618 608 240 2439
[email protected] [email protected]
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Overview
Todays Topics:
Construction Lifecycle
Owners Responsibilities
Contracting Methods Key Risks
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Polling Question #1
A. To enhance my knowledgeof construction contracting
B. Because my organization
has a major upcomingconstruction project
C. I am interested in learningmore about how I can
construction projects at myorganization
. ons ruc on con rac s areunique and Im curious tolearn more!
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Please respond using the polling section in the WebEx screen to the right.
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Construction Lifecycle
Insert graphic from word doc
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*Architect/Engineer (A/E)
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Construction Project Management Team
Owners Internal Audit orRepresentative
Representative
Office of GeneralCounsel
ArchitectConstruction
Manager
Other Groups andta e o ers.
Internal & External
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Polling Question #2
A. Very familiar; I could
have a fast acedconversation with myconstruction team
with constructionterminology?
. am ar; wou ene
from a brush up on keyterms and risks
C. Unfamiliar with key termsand risks
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Please respond using the polling section in the WebEx screen to the right.
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Key Terms
Competitive Bid
Negotiated
Master Services Agreement
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Key Terms
Contract Types: ump um pu a e um or xe r ce
Guaranteed Maximum (GMAX or GMP)
Unit Price
Time & Material Cost Plus Fixed Fee or Cost Plus Percentage Fee
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Key Terms
Contracting Methods: Competitive Bid
Negotiated
Construction Management Not at Risk
Prime Contracting
Direct Contracting
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Key Terms
Project Delivery Methods: es gn u
Design Build
Inte rated Pro ect Deliver
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Key Terms
Financial Terms: a or ur en a es
Overhead Rates
General Conditions
Procurement Burden and Mark-Up Overbilling
ggress ve ng
Value Engineering
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Construction Lifecycle: Feasibility and
Key Risks of This Stage: Stakeholder identification
Architect selection
Conflicting pragmatic and political objectives
Note: Architects and engineers are nottypically bid but are selected based upontheir technical qualifications
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Polling Question #3
Which contract method . Lump Sum
B. Cost Plus
is most used withprojects greater than$10M?
C. Unit Price
D. GMP/GMAX
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Please respond using the polling section in the WebEx screen to the right.
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Construction Lifecycle: Contractor
Key Activities of This Stage:
responsibility)
Assemble bid package with specifications (facilitys
Request financial package Credit report
Audited or reviewed year end financials
Current financials or n rocess sc e u e
Backlog schedule
List of recent layoffs
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Construction Lifecycle: Contractor
Key Activities Continued: n ca ors o nanc a wea ness
Significant changes in owners equity
Weak cash position
Repeated late payments to suppliers
Outstanding and recent contractors liens
Refusal to supply financial information, especially if it is thecurrent nanc a statement
Mitigation strategy: Request a performance bond. The bond
underwriter will also closely examine the financial strength ofe con rac or e ore un erwr ng e pro ec .
Caution: Performance bonds dont mitigate all of the risks! Anowner will not be reimbursed for time delays, cost of rework,
additional internal efforts, or cost of capital.
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Construction Lifecycle: Contractor
Key Risks of This Stage: e ec ng a con rac or a s unqua e or oes no ave e
financial stability to deliver the project and support its warrantyobligations
Example:A financially weak contractor may result in suppliers and
.significant:
Liens against the building may prevent occupancy
Reluctance or refusal by professionals to work on the project
Lost discounts and credits, even late payment penalties
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Construction Lifecycle: Contracting
Key Activities: e erm n ng con rac me o
Negotiating contract terms, conditions,and provisions
Risks: Paying too much for the building
Restricting the owners ability to controlfinancial risk
Empowering the contractor to legallytake advantage of the owner
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Construction Lifecycle: Contracting
Lump Sum:
Facility is fully designed
Designs are simple and often a duplicate ofanother facility
There are fewer unknowns that lead tochange orders
Benefits: Known financial commitment Less owners administrative burden
Less risk of scope creep and budget overrun
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Construction Lifecycle: Contracting
Guaranteed Maximum Price (GMP) sua y use on arger pro ec s
Project nature is complex with unknowns
Often cou led with a concurrent desi n rocess
Benefits: Establishes a not-to-exceed price
Enables the owner to benefit from value addedengineering, price reductions, and well managedprocurement
Enables the owner to select and contract with thecontractor while still designing the facility
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Construction Lifecycle: Contracting
GMP Continued
Disadvantages: Requires a more complex contract that specifies as much as
ossible
Burdens the owner with more project management andadministration
abuse behavior
Contractors like to believe that their budget is the entire
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Construction Lifecycle: Contracting
Cost Plus or Time and Material Contracting sua y oun n g y comp ex an very arge pro ec s or
extremely small maintenance projects
Unable to determine or estimate the overall project cost
Projects typically last many years Used on projects like nuclear power plants and refineries
Enables an owner to segment a very large project into multiple
smaller projects
Advances the construction timetable so that progress is madeon simple phases while engineering continues on morecomplex phases
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Construction Lifecycle: Contracting
Unit Price Contracts: yp ca y use n a u y se ng or ype o serv ce
Limited application, used on projects like underground pipingand road construction
These contracts establish a rate price for each type of serviceto be delivered
The deliver uantities ma or ma not be known
Unit price for each segment of work includes all direct and
indirect construction costs
High degree of control over scope and pricing
Chan e orders are easier to calculate
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Construction Lifecycle: Contracting
Starting point:
American Institute of Architect (AIA) ContractsAIA written to favor the architect and contractor, not the owner and
should onl be considered a startin oint
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C i Lif l C i
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Construction Lifecycle: Contracting
Provisions that apply to all contracts: ange or er process or scop ng, pr c ng, an
approval
Process for handling owner allowances and credits
Process and pricing for reduction in work scope Process for using and reporting contingency budget
Business ethics and professional conduct
Insurance, guarantee, and warranty requirements Right to audit clause
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P lli Q ti #4
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Polling Question #4
Why are change orders . Scoping and approvaloccur quickly
inherently more riskythan other constructionevents?
. Minimal documentation
C. Little to no competitivepricing
D.All of the above
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Please respond using the polling section in the WebEx screen to the right.
C t ti Lif l C t ti
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Construction Lifecycle: Contracting
Change order provisions should includee o ow ng:
Definition of major and minor change order
Authorit for a rovin each t e of chan e order
Authority for using contingency budget Change order documentation
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Construction Lifecycle: Contracting
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Construction Lifecycle: Contracting
Change order documentation shouldnc u e: Who is performing the work
Cost breakdown of materials and labor with uantities and
rates for each Contractor markup
Clear description of why the change order is necessary
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Construction Lifecycle: Contracting
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Construction Lifecycle: Contracting
Example m on renova on pro ec
Design change necessitated $750,000 ofadditional electrical work
Construction contract defined change orderapproval, contractor billing rates andmarkup on materials.
Subsequent change order reviewuncovered markup had been taken on
materials and labor.
Contractor refunded the owner $46,000.
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Construction Lifecycle: Contracting
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Construction Lifecycle: Contracting
Provisions that are mostapp ca e o an osPlus:
this covers Construction management fee and definition
-costs in the formula
Self-performed trade and craft costs ra e, cra , an pro ess ona ra e sc e u es
Allowable pass through expenses
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Construction Lifecycle: Contracting
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Construction Lifecycle: Contracting
Costs typically included in Generalon ons:
Job site trailer and utilities
Winter conditions
Small tools charge Project manager and principal labor charges
m n strat ve an over ea costs
Layout yard and construction material storage
Value en ineerin
Accounting and project reporting
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Construction Lifecycle: Contracting
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Construction Lifecycle: Contracting
Costs that are not typically included in
enera on ons an are e wner sresponsibility:
General foremen and supervisory costs Pickup trucks and transportation
Construction material purchasing and transportation
Computer and office equipment
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Construction Lifecycle: Contracting
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Construction Lifecycle: Contracting
Provisions that are most
app ca e o anCost Plus:
burden rates Shared savings calculation
e -per orme wor
Bidding
Pricing Reporting
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Construction Lifecycle: Contracting
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y g
Labor Burden should not include: on rac or mar up or pro marg n
Overhead allowance
Vehicle allowance
Tool allowance Union dues
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Construction Lifecycle: Contracting
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y g
Labor Burden risks: verc arg ng or a owa e ur en cos s
Charging for non-allowable costs
Double char in for costs also covered b eneral conditions
Double charging for costs that are specific pass throughexpenses
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Construction Lifecycle: Contracting
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Shared Savings Calculations s an ncen ve program mu ua y agree upon e ween e
owner and contractor to share in savings that arise from:
Value engineering
Aggressive purchasing strategies
Shared savings risk: Materials that are commodity priced shoulde exc u e rom e s are sav ngs ca cu a on.
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Construction Lifecycle: Contracting
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Self-Performed Workra e an cra cons ruc on a s per orme y e pr me
contractor. Typical self-performed trades include: site preparation,concrete footings, floors and walls, wall framing, drywall finish,
.
Self-performed work should be competitively priced with aseparate pricing and scoping document explicitly definingscope, rates, materials and pricing method.
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Construction Lifecycle: Bidding
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Key Risks: ona ons an con rac or pre erence
Unethical bidding practices
Kickbacks
Courtesy bids and not competitive bidsExample:The prime contractor is also a concrete and masonry contractorand intends to bid on this phase of work. The other subcontractors
in the market dont believe that they will have a legitimate chanceto win the work and dont submit their best price for the work.The primes bid is lowest and they are awarded the concretework, even though this may not have been the lowest price
ac eva e.
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Preconstruction Planning and Due
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Action Items: s a s con rac ng goa s an o ec ves
Establish development teams roles andresponsibilities
Determine subcontracting methodology
Develop contractor qualification criteria
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Preconstruction Planning and Due
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Action Items: eve op awar cr er a
Develop owner communication requirements
Develo ro ect erformance re ortin re uirements
Develop project cost and financial reporting requirements Develop owners right to audit requirements
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Additional Contract Provisions
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Project performance reporting arne va ue repor ng
Cash requirements forecasts
Construction schedule
Budgeted costs to actual Estimate to complete forecast
Reporting requirements should include:
Delivery deadlines
Content
Format
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Additional Contract Provisions
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Pay Application (Invoice) Documentationac mon e pay app ca on s ou e accompan e y:
Material invoices and receiving tickets
Time sheets for self- erformed work
Subcontractor invoices Equipment logs for contractor provided equipment
en wa vers
Equipment rental invoices
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Additional Contract Provisions
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Contractor Payment Termsyp ca erms requ re e owner o pay e con rac or w n
days of the pay application invoice. Consider the followmodifications:
Payment period begins on the acceptance of a complete pay
application, not the pay application date Consider owner direct payment for major material purchases
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Right to Audit Language
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This must be reviewed by your legal counsel prior to
implementation:
Right to Audit
Availability of Records. The records of the parties to this Agreement relating to the Project,which shall include but not be limited to accounting records (hard copy, as well as computerreadable data if it can be made available; subcontract files (including proposals of successfuland unsuccessful bidders, bid recaps, bidding instructions, bidders list, etc); original estimates;
estimating work sheets; correspondence; change order files (including documentation coveringnegotiated settlements); backcharge logs and supporting documentation; general ledgerentries detailing cash and trade discounts earned, insurance rebates and dividends; any other
agreement, and all other agreements, sources of information and matters that may in Ownersreasonable judgment have any bearing on or pertain to any matters, rights, duties orobligations under or covered by any contract document (all foregoing hereinafter referred to asRecords) shall be open to inspection and subject to audit and/or reproduction by Ownersrepresentative and/or agents of Owner. Owner may also conduct verifications such as, but notlimited to, counting employees at the job site, witnessing the distribution of payroll, verifyingpayroll computations, overhead computations, observing vendor and supplier payments,miscellaneous allocations, special charges, verifying information and amounts through
, , ,
contractors representatives. All records shall be kept for seven (7) years after FinalCompletion.
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Right to Audit Language
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Right to Audit Continued:
Flow down.
CM/GC and Architect shall require that all of their payees (including Architects Consultants,Subcontractors and Suppliers) comply with the provisions of the Right to Audit article byincorporating these requirements in all written contracts. This requirement to include flowdown right to audit provisions in contracts with payees shall also apply to Subcontractors and
- , .request all of their payees to cooperate fully in furnishing or in making Records available to
Owner, provided, however, the CM/GC and Architect shall not be responsible for any failure ofArchitects consultants, Subcontractors or Suppliers to comply with recordkeepingrequirements after the date of Final Completion.
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Additional Resources
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www.bakertilly.com/construction-audit-webinar
. . https://www.thenaca.org/
http://www.caacci.org/
http://rsmeans.reedconstructiondata.com/
http://www.auditnet.org/
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Any Questions?
Please feel free to ask questions in the screen to your right.
We will answer as many questions as time permits.
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Contact Information
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608 240 2618
Erik Schuchardt
608 240 2439
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