This article provides a summary of key construction risks and types of construction contracts and pricing regimes commonly adopted in the construction industry in Australia to manage those risks. The summary below can be used as a guideline for selecting the most suitable construction contract and pricing regime to manage key risks for your project.
In the author’s (Julian Troy) humble opinion, the type of contract adopted is less critical when compared with the detailed contract terms and pricing regime adopted and how the latter are crafted to best manage the key risks.
Key construction risks most likely to impact overall project cost include:
Although there are a variety of other relevant risks to any construction project, the matters above are summarised for the purposes of offering a simple guideline for selecting a suitable form of construction contract and pricing regime to assist in managing those risks.
The contractor is engaged to construct the structure in accordance with a final approved design. This minimises design risk during the construction process, where design obligations rest with the principal (and are shared with its consultants) and construction risks rest with the contractor.
The contractor is engaged for both the design and construction phase. The design obligations rest with the contractor who is often provided with a preliminary or concept design by the principal. D&C contracts aim to enhance coordination of design and construction to minimise both design and construction risks, which are better managed in the hands of one party.
Infrastructure projects often adopt a D&C contract model whereby the principal, contractor and third parties work together in the design process and finalise the scope of works, to be delivered as an Engineering, Procurement & Construction (EPC) contract, a form of D&C contract. Like a D&C, this form of contract aims to enhance coordination of design and construction to minimise both design risks and construction risks.
The contractor is engaged to manage and co-ordinate the works by engagement of separate subcontractors as agent for the principal. The principal adopts all design risk, the subcontractor assumes construction risk, and the management of all other risks rests with the construction manager consistent with the terms of the contracts.
Amended Australian Standard construction contracts (barely comparable to their original standard form) and bespoke contracts are widely used. They are typically characterised as either construct only or D&C contracts, and D&C versions are modified into specialist procurement contracts (e.g. off-site prefabrication and modular component contracts). Public sector contracts (GC-21 and HC-1) and private sector contracts (Commercial Master Builders Contracts) may also be styled as construct only or D&C. With the growth of off-site prefabrication and modular construction in Australia, modified D&C contracts (amended standard and bespoke) are likely to become more widely used.
The pricing regimes may be adopted under any form of construction contract. Common contract pricing regimes used in construction in Australia include:
Suitable for construct only contracts with a final and approved detailed design that offers scope certainty with minimal changes expected.
Suitable where there is a degree of scope certainty and where budgetary limits are acknowledged. However, portions of the work may present design challenges, incomplete design, or the potential for site co-ordination issues best managed by the contractor.
Suitable for known and agreed quantities of materials and scope to be performed at agreed rates, with the potential for ongoing works or multiple packages of a similar scope of works.
Suitable where a final approved design offers scope certainty, budget constraints are not a key consideration, and meeting a completion date is a primary consideration.
These pricing structures may be adopted in combination for different stages of work on the same project for various reasons that may impact only a certain portion of the work.
Some of the key factors that influence both the form of contract and pricing regime adopted are outlined below:
If design risks are the primary concern due to budget constraints, consider adopting a construct only fixed-price construction contract.
If timing risk and a completion deadline are the primary concern and budget constraints exist, consider adopting a D&C contract (to improve the time efficiency from design to completion) at a Guaranteed Maximum Price (GMP).
If construction risk is a major concern due to project complexity, consider early contractor involvement in the design phase and a D&C-style contract at a fixed price or GMP. If construction risk is minimal due to certain material quantities and repetitive work over time, a schedule of rates may be adopted.
As a general guideline to maximise time and cost certainty, a D&C contract with early contractor involvement and independent certification of both design and construction phase services should be considered.
Despite the guideline principles outlined above, it is important to recognise that the terms of the construction contract itself - covering detailed scope and specifications, design obligations, inclusions and exclusions, variations, extensions of time, suspension, latent conditions, access, programming, claims, delay costs, and liquidated damages (LDs)-are the ultimate tools that fine-tune the management of the key risks mentioned above in a detailed and precise way.
While there are various types of construction contracts and pricing regimes in Australia that can be used to better manage key risks for your project, the real substance of risk management is in the detailed contract terms themselves. Properly drafted terms are the key to minimising risk and managing complexity.
Ensure you get the right type of construction contract. Troy Legal supports principals, owners, consultants, contractors, subcontractors, and suppliers in SEQ with contract reviews, writing, disputes, and payment recovery.
For tailored advice and guidance, reach out to Troy Legal today. Call (07) 3854 2315 or contact us online.
This article provides a summary of key construction risks and types of construction contracts and pricing regimes commonly adopted in the construction industry in Australia to manage those risks. The summary below can be used as a guideline for selecting the most suitable construction contract and pricing regime to manage key risks for your project.
In the author’s (Julian Troy) humble opinion, the type of contract adopted is less critical when compared with the detailed contract terms and pricing regime adopted and how the latter are crafted to best manage the key risks.
Key construction risks most likely to impact overall project cost include:
Although there are a variety of other relevant risks to any construction project, the matters above are summarised for the purposes of offering a simple guideline for selecting a suitable form of construction contract and pricing regime to assist in managing those risks.
The contractor is engaged to construct the structure in accordance with a final approved design. This minimises design risk during the construction process, where design obligations rest with the principal (and are shared with its consultants) and construction risks rest with the contractor.
The contractor is engaged for both the design and construction phase. The design obligations rest with the contractor who is often provided with a preliminary or concept design by the principal. D&C contracts aim to enhance coordination of design and construction to minimise both design and construction risks, which are better managed in the hands of one party.
Infrastructure projects often adopt a D&C contract model whereby the principal, contractor and third parties work together in the design process and finalise the scope of works, to be delivered as an Engineering, Procurement & Construction (EPC) contract, a form of D&C contract. Like a D&C, this form of contract aims to enhance coordination of design and construction to minimise both design risks and construction risks.
The contractor is engaged to manage and co-ordinate the works by engagement of separate subcontractors as agent for the principal. The principal adopts all design risk, the subcontractor assumes construction risk, and the management of all other risks rests with the construction manager consistent with the terms of the contracts.
Amended Australian Standard construction contracts (barely comparable to their original standard form) and bespoke contracts are widely used. They are typically characterised as either construct only or D&C contracts, and D&C versions are modified into specialist procurement contracts (e.g. off-site prefabrication and modular component contracts). Public sector contracts (GC-21 and HC-1) and private sector contracts (Commercial Master Builders Contracts) may also be styled as construct only or D&C. With the growth of off-site prefabrication and modular construction in Australia, modified D&C contracts (amended standard and bespoke) are likely to become more widely used.
The pricing regimes may be adopted under any form of construction contract. Common contract pricing regimes used in construction in Australia include:
Suitable for construct only contracts with a final and approved detailed design that offers scope certainty with minimal changes expected.
Suitable where there is a degree of scope certainty and where budgetary limits are acknowledged. However, portions of the work may present design challenges, incomplete design, or the potential for site co-ordination issues best managed by the contractor.
Suitable for known and agreed quantities of materials and scope to be performed at agreed rates, with the potential for ongoing works or multiple packages of a similar scope of works.
Suitable where a final approved design offers scope certainty, budget constraints are not a key consideration, and meeting a completion date is a primary consideration.
These pricing structures may be adopted in combination for different stages of work on the same project for various reasons that may impact only a certain portion of the work.
Some of the key factors that influence both the form of contract and pricing regime adopted are outlined below:
If design risks are the primary concern due to budget constraints, consider adopting a construct only fixed-price construction contract.
If timing risk and a completion deadline are the primary concern and budget constraints exist, consider adopting a D&C contract (to improve the time efficiency from design to completion) at a Guaranteed Maximum Price (GMP).
If construction risk is a major concern due to project complexity, consider early contractor involvement in the design phase and a D&C-style contract at a fixed price or GMP. If construction risk is minimal due to certain material quantities and repetitive work over time, a schedule of rates may be adopted.
As a general guideline to maximise time and cost certainty, a D&C contract with early contractor involvement and independent certification of both design and construction phase services should be considered.
Despite the guideline principles outlined above, it is important to recognise that the terms of the construction contract itself - covering detailed scope and specifications, design obligations, inclusions and exclusions, variations, extensions of time, suspension, latent conditions, access, programming, claims, delay costs, and liquidated damages (LDs)-are the ultimate tools that fine-tune the management of the key risks mentioned above in a detailed and precise way.
While there are various types of construction contracts and pricing regimes in Australia that can be used to better manage key risks for your project, the real substance of risk management is in the detailed contract terms themselves. Properly drafted terms are the key to minimising risk and managing complexity.
Ensure you get the right type of construction contract. Troy Legal supports principals, owners, consultants, contractors, subcontractors, and suppliers in SEQ with contract reviews, writing, disputes, and payment recovery.
For tailored advice and guidance, reach out to Troy Legal today. Call (07) 3854 2315 or contact us online.
.svg)
