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Construction Manager vs. General Contractor

 

Construction projects never seem to go exactly according to plan. Perhaps no one knows this better than the owner who finances such a project. Change orders push the budget past its limits, unbuildable plans cause major delays, the soil conditions aren’t quite as expected . . . the list goes on.

This is likely why there seems to be a trend for owners to engage a construction manager (CM) right from the beginning of the process to help mitigate these unforeseen costs and hassles. The owner’s hope is that having an expert on board early on to help guide the process will help mitigate some of these issues down the line.

But before unwary owners get too excited about an expert holding their hand throughout the whole construction process, they should be aware that using a CM entails risks of its own. These risks arise often where, in the CM model, the construction work is not competitively bid. So rather than rely on the market for the best construction price, owners must rely on their own judgment and the CM’s expertise.

This article walks through some of the pros and cons of using a CM over the “traditional” approach of hiring a general contractor at the construction stage to execute existing architectural plans. This article then discusses some potential solutions to better align the CM’s interests with the owner’s when it comes to efficiency and cost-savings.

The General Contractor Model

A primary benefit of using a general contractor is that the price the owner pays comes from a competitive bid among multiple general contractors. Ideally, this competition results in the lowest construction price. Furthermore, the general contractor is incentivized to perform the work efficiently because every construction dollar saved increases the general contractor’s profit margin.

However, there are also potential issues with the general contractor arrangement. First, if the bid is set based on less-than-complete construction documents, there are likely to be numerous change orders, which can be costly. Numerous change orders likely will lead to disagreements about whether change orders are within the scope of the original construction plans and, thus, the responsibility of the general contractor.

Another issue is that the competitive bid might not always deliver the lowest cost. For example, the original construction plans might not account for a number of expensive issues. Maybe the original plans include elements that are virtually impossible to build or that would lead to awkward spaces. Or, maybe the original plans have the potential to be redesigned to realize changes that provide marginal benefits that exceed the marginal costs of such changes. A wall that could be moved over six inches might result in a building with the same benefit to the owner, while saving thousands of dollars in construction costs.

The Construction Management Model

A construction manager (CM) is hired in the early stages of the construction process, typically before or immediately after an architect is brought on to the project. The role of the CM is to manage and oversee the entire construction project from soup to nuts, and CMs often perform the actual construction work (often referred to as a “CM at-risk”). Alternatively, the CM’s role could be limited to that of an advisor, contributing to the project as a consultant helping the owner to manage hiring, design, quality standards and deadlines.

Having a CM’s expertise early on can be helpful. For example, in the pre-construction planning and design phase, the CM’s early constructability review of the architect’s plans can minimize change orders that cause cost and delay, while also unlocking value-adding changes. The CM can analyze the owner’s budget to confirm that it is reasonable, given the parameters of the project. The CM can also evaluate the project schedule and identify construction-sequencing issues that might impact the schedule.

However, the CM model also can present issues. These stem primarily from the lack of competitive bidding for the project. Without a competitive bid, the owner now has the burden of trying to negotiate a reasonable fee for the CM and a reasonable cost for the entire project, which in and of itself requires some level of knowledge and sophistication.

This creates a quandary for owners. Owners hire CMs because they lack the expertise or time necessary to oversee a construction project on their own. But without financial incentives to make sure the project gets done as inexpensively and efficiently as possible, how can owners ensure that CMs are doing a good job? Who will oversee the overseer?

Potential Solutions to Align the Owner and CM’s Interests

Owners can do a combination of things to help overcome these issues.

First, they can divide the CM contract into two parts that are negotiated at different times:

1.      Pre-construction Phase. This part of the contract sets out the scope of the work and fixes a fee for pre-construction services.

2.      Construction Phase. This part specifies the cost of the actual construction or provides a mechanism for negotiating it.

In addition, prior to the construction phase, owners and CMs can negotiate a “guaranteed maximum price” (GMP) for the cost of construction. In many instances, with a GMP in place, the owner and the CM will have agreed that: (1) if the CM completes the project for a price below the GMP, the owner and the CM split the cost savings by an agreed percentage; or (2) if the CM goes over budget, the owner subtracts the extra expenses from the CM’s overall fee. Like the general contractor arrangement, this encourages the CM to complete the project under budget.

However, what’s to stop a CM from exploiting an owner’s lack of expertise in construction pricing? Owners worry that the CM will overestimate the construction budget when negotiating the GMP in order to collect its “cost-savings” incentives for coming in under the GMP.

This is where it may be beneficial to hire an outside expert consultant to help the owner during the negotiation of the GMP, if the owner doesn’t have construction expertise in-house. Without a competitive bid, it may be helpful to hire another expert in the construction field as a pair of objective eyes to evaluate the reasonableness of the CM’s proposed GMP. This presents yet another expense for the owner, but it could help save money and hassle in the long run.

Finally, whether or not the owner uses an outside expert to evaluate the GMP, the owner could reserve the right in the CM contract to terminate the contract on completion of the pre-construction services. Doing so will allow the owner to competitively bid the construction work if both parties can’t agree on the GMP or the owner prefers to run a competitive bid and invite the pre-construction CM to participate.

Conclusion

Owners having construction expertise and time to dedicate to a construction project might not need to engage a CM. However, without these internal capabilities, choosing to hire a CM early on in a construction project might help lower costs and aggravations over the course of the project. Owners who go this route, however, should take care to put the proper incentives in the CM contract for their CM to seek to help lower costs. Specifically, owners can negotiate a GMP (leveraging the owner’s expertise or that of an outside expert) and reserve the right to competitively bid out construction after the pre-construction phase.