Choosing the Right Construction Contract: Setting Your Project Up for Success

At the outset of any project, one of the most important decisions an owner will make is how the project will be contracted.

It is not just a legal formality. The contract structure influences how risk is allocated, how the project team works together, when cost certainty is established, and how decisions are made throughout design and construction.

At Westbourne, four contract structures we regularly encounter are:

• CCDC 2 – Stipulated Price Contract
• CCDC 3 – Cost Plus Contract
• CCDC 5A – Construction Management Contract – for Services
• CCDC 5B – Construction Management Contract – for Services and Construction

Each has advantages and considerations. The appropriate structure depends on the project, the stage of design, the owner’s objectives, schedule requirements, and the level of risk each party is prepared to manage.

CCDC 2: Stipulated Price

CCDC 2 is the traditional stipulated price, or lump sum, model. The contractor agrees to perform the work for a stipulated price based on a defined scope of work.

Benefits:

• Greater cost certainty at contract award
• Clear contractual allocation of responsibilities
• Familiar and widely used procurement model

Best suited for:

• Projects with a well-developed design and clearly defined scope
• Projects with fewer unknowns
• Projects where significant changes during construction are not anticipated

Considerations:

• Changes to the design or scope after contract award can result in additional costs
• Unknown conditions can create cost and schedule impacts
• Less suited to projects requiring construction to begin while significant portions of the design are still developing

A CCDC 2 can be very effective when the project is sufficiently defined before tender. The important distinction is that a stipulated price provides certainty around the scope that has been priced. It does not eliminate the financial impact of subsequent changes or unforeseen conditions.

CCDC 3: Cost Plus

Under CCDC 3, the contractor is paid the actual cost of the work plus an agreed fee. Rather than establishing a fixed construction price at the outset, the final cost develops as the work proceeds.

This approach provides flexibility where the full scope or cost of the work cannot reasonably be established before construction begins.

Benefits:

• Allows construction to proceed before the full scope is defined
• Provides transparency into actual construction costs
• Flexibility to respond to changing conditions or evolving scope
• Can reduce the need to price significant uncertainty into a stipulated price

Best suited for:

• Projects where the scope cannot be fully defined at the outset
• Renovations or projects with significant existing-condition unknowns
• Projects where schedule requires work to begin before design is complete
• Situations where flexibility is more important than early cost certainty

Considerations:

• The owner retains greater cost risk
• Final construction cost is not known at contract award
• Clear definitions of reimbursable costs and contractor fees are important
• Strong cost reporting and oversight are required throughout construction

CCDC 3 can be an effective structure where uncertainty makes establishing a reliable stipulated price difficult, or where starting work early provides significant value. In these situations, transparency, cost controls and active project management become particularly important.

CCDC 5A: Construction Management

Under CCDC 5A, the Construction Manager provides construction management services to the owner, while the owner contracts directly with the trade contractors.

This structure allows the Construction Manager to become involved earlier in the project and provide input into areas such as constructability, scheduling, procurement and cost planning while the design is still developing.

Benefits:

• High degree of cost transparency
• Early construction expertise during design
• Flexibility to tender and award trade packages progressively
• Ability to commence portions of the work before the entire design is complete

Best suited for:

• Complex or phased projects
• Projects with evolving scope or design
• Projects where schedule benefits can be achieved through early procurement or construction
• Owners who have the structure and capacity to manage additional contractual and financial risk

Considerations:

• The owner holds the individual trade contracts and assumes greater associated risk
• Overall cost certainty develops progressively as trade packages are tendered
• The model requires active owner involvement and strong project management

For the right project and owner, CCDC 5A can provide significant flexibility and transparency. It can also allow the team to respond to design, procurement and market conditions as the project develops.

CCDC 5B: Construction Management for Services and Construction

CCDC 5B provides another approach to construction management. The Construction Manager is engaged during the pre-construction phase and subsequently performs the construction work.

The contract provides different approaches to establishing the final construction price. Depending on the agreed structure, the project can continue on the basis of actual cost plus a fee, or the parties can establish a stipulated price or Guaranteed Maximum Price (GMP).

This flexibility is one of the key distinctions of the 5B model.

Benefits:

• Early Construction Manager involvement during design
• Progressive development of construction cost information
• Flexibility in how the final construction price is established
• Opportunity to establish a stipulated price or GMP as the design becomes more developed

Best suited for:

• Complex projects that benefit from early contractor involvement
• Projects where design and construction activities may overlap
• Owners seeking early collaboration while retaining the ability to establish greater cost certainty later in the project

Considerations:

• The timing of establishing a stipulated price or GMP is important
• The level of design completion at that point affects the reliability of the price
• Scope, assumptions, allowances and exclusions need to be clearly understood
• The appropriate pricing approach will depend on the project and the owner’s risk objectives

CCDC 5B can provide a useful balance between early collaboration and later cost certainty, while allowing the contracting strategy to respond to the circumstances of the project.

Contract Strategies Can Evolve

The contract selected at the beginning of a project does not always need to be the contract used through completion.

On some projects, there can be significant value in engaging a Construction Manager early under a CCDC 5A. This allows the owner to benefit from construction expertise during design, progressively tender trade packages and begin early work where appropriate.

As the design advances, more trade packages are tendered and the overall scope and cost become better defined, the owner may choose to transition to a stipulated price arrangement, such as CCDC 2.

This approach can provide the flexibility and transparency of construction management during the earlier stages of a project, followed by greater cost certainty and a different allocation of risk once sufficient information is available.

The timing of any transition is important. Moving too early can result in significant assumptions, allowances or risk premiums being incorporated into the price. Moving later can provide greater pricing certainty but leaves the owner carrying more cost risk for longer.

The contracting strategy should therefore be considered throughout the project rather than treated as a decision that is made once and never revisited.

So, Which One Is Best?

There is no universal answer.

• CCDC 2 can work very well where the design and scope are sufficiently defined before tender.
• CCDC 3 provides flexibility where scope or existing conditions make it difficult to establish a reliable price at the outset.
• CCDC 5A can provide significant flexibility, transparency and value on complex or evolving projects where the owner has the structure in place to manage the additional risk.
• CCDC 5B can provide many of the benefits of early Construction Manager involvement while offering flexibility in how the construction price is ultimately established.

And, in some cases, the right answer may be a combination of these approaches as the project progresses.

The important thing is not to select a contract simply because it is familiar. The contract and procurement strategy should reflect the characteristics of the project and can evolve as those characteristics change.

Our Approach

At Westbourne, we start with the project, not the contract.

We consider:

• Level of design development
• Project complexity and unknowns
• Schedule and procurement pressures
• Market conditions
• Owner capacity and desired level of involvement
• Risk allocation and appetite
• Timing and importance of cost certainty

From there, we work with the owner and project team to establish a procurement and contracting approach that supports the project’s objectives.

Ultimately, a construction contract is more than the document that gets signed before construction begins. The right structure establishes the framework for how the team will work together, manage risk and make decisions throughout the life of the project.