Concepts
Contract types and delivery methods directly impact construction project outcomes, influencing factors such as cost overruns, project duration, and risk distribution between parties. One specific aspect to consider while studying for the Project Management Institute-Construction Professional (PMI-CP) exam is how these contract selections affect the frequency of claims during and after the project execution.
I. Contract Types and Claims
Contracts are legally binding agreements that regulate the interactions between parties. In construction projects, the contract establishes the responsibilities, rights, and obligations between the project owner and the contractor. The type of contract chosen can significantly impact the likelihood of claims because it directly impacts risk distribution.
A. Fixed-Price or Lump-Sum Contracts
In fixed-price contracts, the contractor agrees to provide defined services for a specified price. The contractor absorbs most risks, including cost overruns. This contract may often lead to a high frequency of claims, especially when there are changes in the scope of work, unforeseen site conditions, or inaccurate schedule and cost estimations.
B. Cost-Plus Contracts
In a cost-plus contract, the contractor is reimbursed for allowable or defined costs, plus a fee. When cost overruns occur, the owner generally bears the responsibility. As such, this type of contract could result in less frequent claims because the contractor’s financial risk is limited.
C. Unit Price Contracts
Under a unit price contract, the contractor is paid a fixed price for each completed unit of work. This contract type can result in a high frequency of claims if there are dramatic changes in work quantities or unanticipated site conditions that affect unit price assumptions.
D. Time and Material Contracts
In time and material contracts, costs for direct labor, materials, equipment, and services are reimbursed. The owner assumes the risk of inefficiency or delay by the contractor, leading, sometimes, to a high frequency of claims.
II. Delivery Methods and Claims
The selected project delivery method, determining the sequence of activities from design to construction, also significantly impacts the likelihood of claims.
A. Design-Bid-Build (DBB)
Under DBB, the owner contracts with separate entities for the design and construction. Since the construction contractor is not involved in the design process, there can often be misunderstandings or discrepancies between the design intent and the actual construction, potentially leading to a higher frequency of claims.
B. Design-Build (DB)
In DB, the design and construction services are contracted by a single entity. This integrated approach can often lead to fewer claims, as the contractor is involved from the early stages of design, reducing discrepancies between intended design and construction.
C. Construction Management at Risk (CMR)
CMR involves a construction manager assuming the risk for construction under a guaranteed maximum price. Since the construction manager is involved from the project’s inception, this delivery method can potentially reduce the frequency of claims.
In conclusion, making the right choices of contract types and delivery methods can significantly mitigate the frequency of construction claims, by aligning the responsibilities, risk distribution, and interactions among the project owner, designer, and contractor. This understanding is a crucial component of skillset for anyone preparing for the PMI-CP examination.
Answer the Questions in Comment Section
True or False: The type of contract chosen can have a significant impact on the frequency of claims in a construction project.
- True.
Correct Answer: True.
Explanation: Different types of contracts distribute risk in different ways. If a contract places more risk on the contractor, it may lead to more claims.
Which of the following contract types is likely to lead to more claims in a construction project?
- a) Fixed Price
- b) Cost Plus
- c) Time and Material
- d) Unit Pricing
Correct Answer: a) Fixed Price.
Explanation: Fixed price contracts put the risk of cost overruns on the contractor, encouraging more frequent claims.
_________ delivery method often results in less claims due to its collaborative approach.
- a) Design-Bid-Build
- b) Design-Build
- c) Integrated Project Delivery
- d) Construction Management At-Risk
Correct Answer: c) Integrated Project Delivery.
Explanation: Integrated Project Delivery promotes collaboration between stakeholders, reducing misunderstandings and claims.
True or False: Construction Management At-Risk (CMAR) delivery method often leads to more claims due to the increased risk for the construction manager.
- True.
Correct Answer: True.
Explanation: In the CMAR delivery method, the construction manager assumes more risk and hence, might file more claims.
In the ________ contract type, the contractor is reimbursed for actual costs and a percentage of the total project cost, reducing the likelihood of claims.
- a) Cost Plus
- b) Fixed Price
- c) Unit Pricing
- d) Time and Material
Correct Answer: a) Cost Plus.
Explanation: In a Cost Plus contract, contractors are less likely to incur unexpected costs, reducing the frequency of claims.
True or False: In a Time and Material contract, contractors are less likely to file claims because they are paid for their time and materials used.
- True.
Correct Answer: True.
Explanation: Time and Material contracts decrease the contractor’s risk, thus reducing the frequency of claims.
Which delivery method often results in more claims due to the push for low bids?
- a) Design-Bid-Build
- b) Design-Build
- c) Integrated Project Delivery
- d) Construction Management At-Risk
Correct Answer: a) Design-Bid-Build.
Explanation: The Design-Bid-Build delivery method often leads to cut corners and misinterpretations, resulting in more claims.
The selection of ___________ contract type often reduces the frequency of claims due to its flexibility.
- a) Fixed Price
- b) Time and Material
- c) Cost Plus
- d) Unit Pricing
Correct Answer: b) Time and Material.
Explanation: Time and Material contracts provide flexibility to adjust scope and costs, reducing potential conflicts and claims.
True or False: Design-Build delivery method often results in fewer claims because of the single point of responsibility.
- True.
Correct Answer: True.
Explanation: Design-Build delivery method reduces claims by consolidating responsibility and promoting clear communication.
In ________ contract type, providers are paid a set amount per unit of service which can lead to more frequent claims due to uncertain quantity and cost.
- a) Cost Plus
- b) Fixed Price
- c) Unit Pricing
- d) Time and Material
Correct Answer: c) Unit Pricing.
Explanation: Unit Pricing contract can lead to more claims when there are fluctuations in the quantity and cost of services.
True or False: Integrated Project Delivery (IPD) method can increase the frequency of claims due to the increased collaboration and shared risks.
- False.
Correct Answer: False.
Explanation: While IPD does involve more collaboration and shared risks, it actually tends to reduce the number of claims due to the enhanced understanding and communication among the team.
Design-Build is a delivery method in which the design and build aspects are contracted by a single entity, therefore ________
- a) Decreasing the frequency of claims
- b) Increasing the frequency of claims
Correct Answer: a) Decreasing the frequency of claims
Explanation: Having a single entity in charge of both design and construction reduces the possibility of misunderstanding and miscommunication, which leads to fewer claims.
Great post! Can anyone explain how a lump-sum contract impacts the frequency of claims compared to a cost-plus contract?
Thanks for sharing this valuable info!
I appreciate the detailed analysis in this post.
Can someone clarify if Design-Build delivery methods have a higher frequency of claims than Design-Bid-Build?
Very informative blog post. Thanks!
What are some common claims associated with Guaranteed Maximum Price (GMP) contracts?
Thanks for the insights!
Great content, really helped in my PMI-CP exam prep!