Analysis of Construction Contract Change Clauses, Volume II

Studies were performed by the Construction Industry Institute (CII) to determine ways to increase construction effectiveness by improving the contractual relationship between the owner and contractor. CII’s Contracts Task Force conducted several studies to investigate construction contract types and clauses (RS5-1), incentive plans (RS5-2), and risk allocation and cost effectiveness (RS5-3).

The aim of the studies was to assess the impact of contract type and contract clauses on key project performance factors: safety, quality, cost, schedule, and satisfaction of owner and contractor. The results of the studies were based on responses from in-depth questionnaires sent to CII members (a mix of owners and contractors spread across several industries).

Well-written construction contracts tailored to the circumstances of the project and based on total agreement between both parties are essential to successful project performance, owner/contractor relations, and cost effectiveness.

No single type of contract is best suited for all projects, but thoughtful preparation of the contract, with balanced input from all parties, is always necessary. Factors that should influence the contract type include the level of definition of the work, fast-tracking to accelerate completion, need for flexibility to make changes during performance of the work, owner’s effort and expertise, and marketplace conditions. Clauses related to work scope definition, changes, and project controls are frequent sources of disputes, and care must be taken to clarify these clauses as necessary. Any inconsistency or ambiguity must be rectified early to avoid later misunderstandings, delays, and increased costs.

Risk allocation must be tailored to the circumstances of the project to realize the cost benefits. Imbalanced risk allocation between owners and contractors will incur higher project costs. The risk allocation on fixed-price contracts is most problematic and was the focus of the studies. Four specific aspects of contract risk allocation were addressed in the task force’s report: indemnity, consequential damages, differing conditions, and delay. Inequitable risk burden on the contractor for each of these aspects is not cost effective for the owner. It is important for all parties involved in the project to be educated on the implications of risk allocation on project performance, and on the differences in contract administration required for cost-reimbursable and lump sum contracts.

Contract incentive plans are a useful mechanism to increase construction cost effectiveness for cost-reimbursable projects and should be employed when possible. To be effective, the incentive plan must be carefully designed to include appropriate features for the project, set fair expectations, and balance contractor motivation for each aspect of the project. Considerations for effective incentive plans are:

• Balance between unilateral (set by owner) versus negotiated (set jointly) plans
• Positive versus negative incentives
• End-of-project outcomes (final outcome) versus milestone determination (intermediate outcomes)

Establishing a positive owner-contractor relationship is crucial and can be achieved by opening communication channels between the owner and contractor, and by giving authority to owner onsite project managers to make decisions at a level closer to the work.  A well-written contract that is agreed upon by all parties will help promote and maintain this working relationship, keep costs at a minimum, and improve overall project performance.