Post on 28-Jul-2020
Construction Contract Fundamentals
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needs
About Baker Tilly
From concept and f nding to controls andFrom concept and funding to controls and compliance, Baker Tilly has more than 250 dedicated construction and real estate industry professionals to assist with your facility development project through all stages of the development lifecycle.
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Introductions
Tony Ollmann Erik SchuchardtCCA, Director CPA, Manager608 240 2618 608 240 2439Tony.Ollmann@bakertilly.com Erik.Schuchardt@bakertilly.com
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Overview
Today’s Topics: Professionals in Construction Activities Professionals in Construction Activities Construction Lifecycle Owner’s Responsibilities Contracting Methods Key Risks Contract Provisions Contract Provisions
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Polling Question #1
Why are you here today?
A. To enhance my knowledge of construction contracting
Why are you here today?B. Because my organization
has a major upcoming construction project
C. I am interested in learning more about how I can contribute to upcomingcontribute to upcoming construction projects at my organization
D C t ti t tD. Construction contracts are unique and I’m curious to learn more!
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Please respond using the polling section in the WebEx screen to the right.
Construction Lifecycle
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*Architect/Engineer (A/E)
Construction Project Management Team
Owner Owner’s Internal Audit or Other ComplianceOwner Representative Other Compliance
Representative
Office of General Counsel Architect Construction
Manager
Other Groups and St k h ldStakeholders.
Internal & External
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Polling Question #2
A. Very familiar; I could have a fast paced How familiar are you pconversation with my construction team
B Familiar I o ld benefit
How familiar are you with construction terminology?
B. Familiar; I would benefit from a brush up on key terms and risks
C. Unfamiliar with key terms and risks
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Please respond using the polling section in the WebEx screen to the right.
Key Terms
Competitive Bid
Negotiated
Master Services Agreement
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Key Terms
Contract Types:L S (Sti l t d S Fi d P i ) Lump Sum (Stipulated Sum or Fixed Price)
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 at Risk Construction Management at Risk Construction Management Not at Risk Prime Contracting Direct Contracting
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Key Terms
Project Delivery Methods:D i Bid B ild Design – Bid – Build
Design – Build Integrated Project Deliveryg j y
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Key Terms
Financial Terms:L b B d R t Labor Burden Rates
Overhead Rates General Conditions Procurement Burden and Mark-Up Overbilling
Aggressi e Billing Aggressive Billing Value Engineering
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Construction Lifecycle: Feasibility and DesignDesign
Key Risks of This Stage: Stakeholder identification Architect selection Delineation of needs and wants Delineation of needs and wants Conflicting pragmatic and political objectives Note: Architects and engineers are not
typically “bid” but are selected based upon their technical qualifications
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Polling Question #3
AWhich contract method
A. Lump Sum
B. Cost Plus
is most used with projects 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.
Construction Lifecycle: Feasibility and DesignDesign
Example:A tl t t d di l hA recently constructed medical research facility ($300M) delayed construction so the design team could collaborate with the mechanical electrical and plumbingmechanical, electrical and plumbing professionals. This resulted in: 10% reduction in overall construction costs
P j t d ti t 12% b l Projected operating costs 12% below budget
Optimum building workflowC it b i d t f th Community buy in and support for the building.
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Construction Lifecycle: Contractor Selection & Due DiligenceSelection & Due Diligence
Key Activities of This Stage: Establish technical qualifications (facility’s Establish technical qualifications (facility s
responsibility) Assemble bid package with specifications (facility’s
responsibility)responsibility) Request financial package
Credit reportCredit references Credit references
Audited or reviewed year end financials Current financials
W k i P (WIP) h d l Work in Process (WIP) schedule Backlog schedule List of recent layoffs
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Construction Lifecycle: Contractor Selection & Due DiligenceSelection & Due Diligence
Key Activities Continued:I di t f fi i l k Indicators of financial weakness
Significant changes in owner’s equity Weak cash position Repeated late payments to suppliers Outstanding and recent contractor’s liens Refusal to supply financial information, especially if it is the
t fi i l t t tcurrent financial statement Mitigation strategy: Request a performance bond. The bond
underwriter will also closely examine the financial strength of th t t b f d iti th j tthe contractor before underwriting the project.
Caution: Performance bonds don’t mitigate all of the risks! An owner will not be reimbursed for time delays, cost of rework, additional internal efforts, or cost of capital.
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Construction Lifecycle: Contractor Selection & Due DiligenceSelection & Due Diligence
Key Risks of This Stage:S l ti t t th t i lifi d d t h th Selecting a contractor that is unqualified or does not have the financial stability to deliver the project and support its warranty obligations
Example:A financially weak contractor may result in suppliers and subcontractors not getting paid The impact to the owner issubcontractors not getting paid. The impact to the owner is significant:
Liens against the building may prevent occupancy Construction delays until subcontractors and suppliers are paidConstruction delays until subcontractors and suppliers are paid Reluctance or refusal by professionals to work on the project Lost discounts and credits, even late payment penalties Impact to the owner’s credit ratingImpact to the owner s credit rating
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Construction Lifecycle: Contracting
Key Activities:D t i i t t th d Determining contract method
Negotiating contract terms, conditions, and provisions
Risks: Paying too much for the building Restricting the owner’s ability to control
financial risk Empowering the contractor to legally
take advantage of the owner
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Construction Lifecycle: Contracting –Determining Contract TypeDetermining Contract Type
Lump Sum: Usually less than $10 million Usually less than $10 million Facility is fully designed Designs are simple and often a duplicate of
another facility There are fewer unknowns that lead to
change orders
Benefits: Known financial commitment Less owner’s administrative burden Less risk of scope creep and budget overrun
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Construction Lifecycle: Contracting –Determining Contract TypeDetermining Contract Type
Guaranteed Maximum Price (GMP)U ll d l j t Usually used on larger projects
Project nature is complex with unknowns Often coupled with a concurrent design processp g p
Benefits: Establishes a not-to-exceed price Enables the owner to benefit from value added
engineering, price reductions, and well managed procurement
Enables the owner to select and contract with the contractor while still designing the facility
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Construction Lifecycle: Contracting –Determining Contract TypeDetermining Contract Type
GMP ContinuedDisadvantages: Requires a more complex contract that specifies as much as
possiblepossible Burdens the owner with more project management and
administration Project complexity leads to more opportunity for aggressive or Project complexity leads to more opportunity for aggressive or
abuse behavior Contractors like to believe that their budget is the entire
maximum pricemaximum price
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Construction Lifecycle: Contracting –Determining Contract TypeDetermining Contract Type
Cost Plus or Time and Material ContractingU ll f d i hi hl l d l j t Usually found in highly complex and very large projects 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
AdvantagesAdvantages Enables an owner to segment a very large project into multiple
smaller projects Advances the construction timetable so that progress is made
on simple phases while engineering continues on more complex phases
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Construction Lifecycle: Contracting –Determining Contract TypeDetermining Contract Type
Unit Price Contracts:T i ll d i tilit tti t f i Typically used in a utility setting or type of service
Limited application, used on projects like underground piping and road construction
These contracts establish a rate price for each type of service to be delivered
The delivery quantities may or may not be knowny q y y Unit price for each segment of work includes all direct and
indirect construction costs
Advantages:Advantages: High degree of control over scope and pricing Change orders are easier to calculate g
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Construction Lifecycle: Contracting
Starting point:American Institute of Architect (AIA) Contracts
AIA written to favor the architect and contractor, not the owner and should only be considered a starting pointshould only be considered a starting point
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Construction Lifecycle: Contracting –Contract ProvisionsContract Provisions
Provisions that apply to all contracts:Ch d f i i i d Change order process for scoping, pricing, and approval
Process for handling owner allowances and credits Process and pricing for reduction in work scope Process for using and reporting contingency budget Progress reporting Progress reporting Business ethics and professional conduct Insurance, guarantee, and warranty requirements Right to audit clause
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Polling Question #4
AWhy are change orders
A. Scoping and approval occur quickly
B
inherently more risky than other construction events?
B. Minimal documentation
C. Little to no competitive pricing
D. All of the above
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Please respond using the polling section in the WebEx screen to the right.
Construction Lifecycle: Contracting –Contract ProvisionsContract Provisions
Change order provisions should include th f ll ithe following: Definition of major and minor change order Authority for approving each type of change order Authority for approving each type of change order Authority for using contingency budget Change order documentation
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Construction Lifecycle: Contracting –Contract ProvisionsContract Provisions
Change order documentation should i l dinclude: Who is performing the work Cost breakdown of materials and labor with quantities and Cost breakdown of materials and labor with quantities and
rates for each Contractor markup Clear description of the scope of work Clear description of the scope of work Clear description of why the change order is necessary
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Construction Lifecycle: Contracting –Contract ProvisionsContract Provisions
Example$6 illi ti j t $6 million renovation project
Design change necessitated $750,000 of additional electrical work
Construction contract defined change order approval, contractor billing rates and markup on materials.
Subsequent change order review uncovered markup had been taken on materials and labor.
Contractor refunded the owner $46,000.
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Construction Lifecycle: Contracting –Contract ProvisionsContract Provisions
Provisions that are most li bl t GMP d C tapplicable to GMP and Cost
Plus: General conditions fees and definition of what General conditions fees and definition of what
this covers Construction management fee and definition
of allowable and non-allowable constructionof allowable and non-allowable construction costs in the formula
Self-performed trade and craft costsT d ft d f i l t h d l Trade, craft, and professional rate schedules
Allowable pass through expenses
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Construction Lifecycle: Contracting –Contract ProvisionsContract Provisions
Costs typically included in General C ditiConditions: Job site trailer and utilities Winter conditions Winter conditions Small tools charge Project manager and principal labor charges
Ad i i i d h d Administrative and overhead costs Layout yard and construction material storage Value engineeringg g Accounting and project reporting
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Construction Lifecycle: Contracting –Contract ProvisionsContract Provisions
Costs that are not typically included in G l C diti d th O ’General Conditions and are the Owner’s responsibility: Insurance Insurance 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 –Contract ProvisionsContract Provisions
Provisions that are most li bl t GMP dapplicable to GMP and
Cost Plus: Established labor and overhead Established labor and overhead
burden rates Shared savings calculation
S lf f d k Self-performed work Bidding Pricing Reporting
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Construction Lifecycle: Contracting –Contract ProvisionsContract Provisions
Labor Burden:L b b d i th i t l t l t tLabor burden is the incremental cost employers cost to carry an employee on the crew. Typical labor burden costs are: Employee benefits Employers social security Workman’s compensation insurance Health and safety Health and safety Federal and state unemployment tax Union assessments (pension, training, etc)
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Construction Lifecycle: Contracting –Contract ProvisionsContract Provisions
Labor Burden should not include:C t t k fit i Contractor markup or profit margin
Overhead allowance Vehicle allowance Tool allowance Union dues
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Construction Lifecycle: Contracting –Contract ProvisionsContract Provisions
Labor Burden risks:O h i f ll bl b d t Overcharging for allowable burden costs
Charging for non-allowable costs Double charging for costs also covered by general conditionsg g y g Double charging for costs that are specific pass through
expenses
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Construction Lifecycle: Contracting –Contract ProvisionsContract Provisions
Shared Savings CalculationThi i i ti t ll d b t thThis is an incentive program mutually agreed upon between the owner and contractor to share in savings that arise from:
Value engineering Aggressive purchasing strategies Contractor’s supplier relationships Contractor s supplier relationships
Shared savings risk: Materials that are commodity priced should b l d d f th h d i l l tibe excluded from the shared savings calculation.
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Construction Lifecycle: Contracting –Contract ProvisionsContract Provisions
Self-Performed WorkT d d ft t ti th t i f d b th iTrade and craft construction that is performed by the prime contractor. Typical self-performed trades include: site preparation, concrete footings, floors and walls, wall framing, drywall finish, trim and finishtrim and finish.
Self-performed work should be competitively priced with a separate pricing and scoping document explicitly defining scope, rates, materials and pricing method.
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Construction Lifecycle: Bidding
Key Risks:D ti d t t f Donations and contractor preference
Unethical bidding practices Kickbacks Courtesy bids and not competitive bids
Example:The prime contractor is also a concrete and masonry contractor and intends to bid on this phase of work. The other subcontractors in the market don’t believe that they will have a legitimate chance to win the work and don’t submit their “best” price for the work. The prime’s bid is lowest and they are awarded the concrete work, even though this may not have been the lowest price
hi blachievable.
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Preconstruction Planning and Due DiligenceDiligence
Action Items:E t bli h t ti l d bj ti Establish contracting goals and objectives
Establish development team’s roles and responsibilities
Determine subcontracting methodology Develop contractor qualification criteria Establish bidding process Establish bidding process
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Preconstruction Planning and Due DiligenceDiligence
Action Items:D l bid d it i Develop bid award criteria
Develop owner communication requirements Develop project performance reporting requirementsp p j p p g q Develop project cost and financial reporting requirements Develop owner’s right to audit requirements
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Additional Contract Provisions
Project performance reportingE d l ti Earned value reporting
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
Pay Application (Invoice) DocumentationE h th th li ti h ld b i d bEach month the pay application should be accompanied by: Material invoices and receiving tickets Time sheets for self-performed workp Subcontractor invoices Equipment logs for contractor provided equipment
Lien ai ers Lien waivers Equipment rental invoices
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Additional Contract Provisions
Contractor Payment TermsT i l t i th t th t t ithi 30Typical terms require the owner to pay the contractor within 30 days of the pay application invoice. Consider the follow modifications: 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
This must be reviewed by your legal counsel prior to implementation:Right to AuditAvailability 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 computer readable data if it can be made available; subcontract files (including proposals of successful and unsuccessful bidders, bid recaps, bidding instructions, bidders list, etc); original estimates; estimating work sheets; correspondence; change order files (including documentation covering negotiated settlements); backcharge logs and supporting documentation; general ledger entries detailing cash and trade discounts earned, insurance rebates and dividends; any other supporting evidence deemed necessary by Owner to substantiate charges related to thissupporting evidence deemed necessary by Owner to substantiate charges related to this agreement, and all other agreements, sources of information and matters that may in Owner’s reasonable judgment have any bearing on or pertain to any matters, rights, duties or obligations under or covered by any contract document (all foregoing hereinafter referred to as “Records”) shall be open to inspection and subject to audit and/or reproduction by Owner’s representative and/or agents of Owner. Owner may also conduct verifications such as, but not limited to, counting employees at the job site, witnessing the distribution of payroll, verifying payroll computations, overhead computations, observing vendor and supplier payments, miscellaneous allocations, special charges, verifying information and amounts through interviews and written confirmations with employees Subcontractors suppliers andinterviews and written confirmations with employees, Subcontractors, suppliers, and contractors representatives. All records shall be kept for seven (7) years after Final Completion.
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Right to Audit Language
Right to Audit Continued:Flow down.CM/GC and Architect shall require that all of their payees (including Architect’s Consultants, Subcontractors and Suppliers) comply with the provisions of the Right to Audit article by incorporating these requirements in all written contracts. This requirement to include flow down right to audit provisions in contracts with payees shall also apply to Subcontractors and Sub Subcontractors and Suppliers CM/GC and Architect shall cooperate fully and willSub-Subcontractors, and Suppliers. CM/GC and Architect shall cooperate fully and will 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 of Architect’s consultants, Subcontractors or Suppliers to comply with recordkeeping requirements after the date of Final Completion.
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Baker Tilly Webinar Series
Coming up in the Understanding Construction Contract Controls and Construction Audit BestContract Controls and Construction Audit Best Practices Webinar Series:
Construction Financial Controls and Contract ComplianceConstruction Financial Controls and Contract ComplianceWednesday, October 12, 201112:00 p.m. Central
Post-Construction Auditing and Fraud DetectionWednesday November 9 2011Wednesday, November 9, 201112:00 p.m. Central
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Register at bakertilly.com/construction-audit-webinar
Additional Resources
www.bakertilly.com/construction-audit-webinar http://www theiia org/ http://www.theiia.org/ 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
Tony OllmannTony Ollmann608 240 2618Tony.Ollmann@bakertilly.comTony.Ollmann@bakertilly.com
Erik Schuchardt608 240 2439Erik.Schuchardt@bakertilly.com
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