10/3/2016

1

Gateway Connectors

Academy

The Essentials to Understanding Subcontracts

Welcome & Thank You

2

Financing Design

Design Builder Maintenance

Welcome & Thank You

Gateway Connectors Steering Committee

3

Gateway Connectors Academy

Mission: by sharing the fundamentals that make our firms successful, we can facilitate success in xBE organizations in the LA Area and build close, long-lasting relationships

Academy Sessions• Monthly (approximately) with Summer 2017

graduation/celebration

Outreach Events (planned)• October 2016

• January 2017

4

LAX-APM Overview

5

The Essentials of Understanding Subcontracts

10/3/2016

2

Barriers of Entry

• What are typical CONTRACTUAL barriers of entry for

Subcontractors?

7

Learning Objectives

• Understand why Subcontracts are important

• Understand how contracts protect both Prime and

Subcontractor from potential issues

• Understand the Prime and Subcontract models and risks associated

• Know how/when to negotiate clauses

8

Our Disclaimer

WE ARE NOT LAWYERS AND THERE ARE NO LAWYERS

HERE TONIGHT.

WE ARE NOT HERE TO GIVE LEGAL ADVICE, NOR

REPLACE YOUR ATTORNEY.

9

Subcontracts & Risk

Why are sub/material contracts important to us?

• 52% percent of corporate revenue 2015

Why do General Contractors/Prime Designers subcontract?

• Shed risk

• ?

• ?

10

Subcontracts & Risk

Why are sub/material contracts important to us?

How do you manage risk?

• Ignore - do nothing and hope it goes away

• Price – contingency, escalation, etc.

• Mitigate – assign the resources to manage risk

• Negotiate – give and take to lower your risk

11

Contract Type Overview

12

Lump Sum

Unit Price

Time

& Materials

Hybrid

10/3/2016

3

Lump Sum

Advantages

• Simplest to manage and invoice

• Highest margin (keep all upside

• Incentivized to build efficiently

Disadvantages

• High number of bidders

• Low price wins…

• Less influence to change the design

• More risk on the subcontractor

13

Element of Lump Sum Contracts

Lump Sum Risk Matrix

Risk Prime Contractor Subcontractor

Weather X X

Labor Supply / Manpower X

Material Supply/Availability X

Differing Site Conditions X Notice

Escalation X

Availability of Specified Equip/Material X

Defective Design X Notice

Qty Over/Underruns X

Cost Overruns – over-run in contract $ X

3rd Party Delays/Approvals X Notice

Schedule delays – execution of the work X

Hazardous Materials X Notice

Project Performance Standards X Notice

Prime Contractor

Risk

Sub Contractor

Risk

Low

Risk

High

RiskLUMP SUM

14

Unit Price Contracts • Unit Price contract establishes fixed prices for units of work.

• Fixed price is what is paid regardless of actual cost to perform the work

• Non-Construction Example: Buying can(s) of soup at the supermarket.

• Construction Example: cubic yard of concrete.

• Approximate quantities are calculated and used as basis for unit prices

• Actual quantities are measured, and the contractor is paid according to the contractor's quoted unit prices

15

Unit Price Contracts

Advantages

• Flexible

• Easily quantifiable selection

• Final design not necessary

• Pre-defined scope items

• Schedule/Cash Flow

Disadvantages

• Fixed unit price

• Variable quantities

• Unknown final cost

• Quality

• Measurement/Tracking

• Unbalanced Bidding

16

Element of Unit Price Contracts

Unit Price Risk Matrix

Risk Prime Contractor Subcontractor

Weather X

Labor Supply / Manpower X

Material Supply/Availability X

Differing Site Conditions X

Escalation X

Availability of Specified Equip/Mat'l X

Defective Design X

Qty Over/Underruns X

Cost Overruns – over-run in contract $ X X

3rd Party Delays/Approvals X

Schedule delays – execution of the work X

Hazardous Materials X

Project Performance Standards X

Prime Contractor

Risk

Sub Contractor

Risk

Low

Risk

High

RiskLUMP

SUM UNIT PRICE

17

Time and Material (T&M)

Elements of T & M Contracts

Advantages

• Anything you spend you get paid for

• Very little risk to the Subcontractor

• Less management involved

Disadvantages

• Less risk = less margin

• Lots of contract administration

• Little ability to influence design

18

10/3/2016

4

Risk Prime Contractor Subcontractor

Weather X

Labor Supply / Manpower X

Material Supply/Availability X

Differing Site Conditions X

Escalation X

Availability of Specified Equip/Mat'l X

Defective Design X

Qty Over/Underruns X

Cost Overruns – over-run in contract $ X X

3rd Party Delays/Approvals X

Schedule delays – execution of the work X

Hazardous Materials X

Project Performance Standards X

Prime Contractor

Risk

Sub Contractor

Risk

Low

Risk

High

RiskLUMP

SUM UNIT

PRICE

T & M

T&M Risk Matrix

19

Alternative Contract Types:

• CM/GC – typical for General contractors

• Performance Incentives – may be part of any contract type

• Target Price Contracts – professional services or designers

• Design-Build or Design Mgmt – involves

subs in design quality/quantity

Alternative Contract Models

20

SUBCONTRACT TERMS BREAKOUT

• Top 10 most confusing/often misunderstood contract clauses

• Review the sample contracts

• Discuss your personal top 10 clauses within your group and be prepared for a group discussion

• Top 9 changes requested by Subcontractors –Subcontract General Provisions

21

WRAP-UP AND EVALUATIONLearning objectives met?

• Understand why subcontracts are important

• Understand how contracts can protect

both Prime and Subcontractor from potential issues

• Understand the prime/subcontract

models we work with and the risks associated with each

• Have a more complete understanding

about how/when to negotiate contract clauses

Things to remember…

• Contracts protect both entities

• Pay attention to Additional

Provisions…if they are in the contract they must be important

• Which contract vehicle is appropriate for your work?

• Know the Prime’s risk and what they

might be willing to negotiate

22

Thank You For Attending

Please fill out your evaluation sheet so that we know

how to improve.

23