Construction Management Contracts-CMc

AIA Contract Document A133 – 2009

Standard Form of Agreement Between Owner and Construction Manager as Constructor where the basis of payment is a Cost of the Work Plus a Fee with a Guaranteed Maximum Price  (sometimes referred to as CM at Risk due to the guarantee)

Perhaps an explanation of what a construction manager (CM) should provide to an owner as conceived originally would help.  CM started in California in the mid 60’s as best anyone can determine.  Someone thought: since the general contractor has become not much more than a broker of subcontractors, why not, eliminate them entirely from the process.  After all, they bid out in most cases, at least eighty percent of the work (80%).  This would eliminate all the monies of markup on their subcontractors.  And, in their place use a construction manager for a predetermined fee; and, one without any affiliations with the design or construction process, and therefore no conflict of interest.  Hire them early to bring their construction expertise into the design for optimizing materials and minimizing costs.  Have them bid the project to enhance local participation.  Then, install a site construction manager to oversee the construction.  Thus, assuring quality work without any conflict of interest involved where profit is a motivator.  The owners, under this method, feel they have a true unbiased advocate for their interest.

Currently, there is a push by general contractors in Indiana to talk counties/owners into using CMc, now allowed, form of contract.  By the vary title, you can see that they would be allowed to do construction work at the site, which of course flies in the face of the potential for a conflict of interest.  It also would cause an owner to wonder just how competitive has this portion of the work been.

The title further indicates that the charge for using this method would be the “Cost of the work plus a Fee”.  So, in the selling process the ‘pitch’ is always the Fee.  There is never a discussion of the other monies that would be gotten per the contract language.  So, if the firm says my fee is 3% the potential client thinks that’s more than reasonable, if that were the extent of it!

This is an actual example of a recent situation in Indiana.  The county was charged a fee of 3% plus $20,000 for the work on preconstruction/design and they were told the firm would guarantee the costs.  We will discuss the validity of this guarantee later.  So what is this “cost of the work” that the 3% is applied to?  This is defined by seeing the thirty six (36) paragraphs in the contract, of what is included in that phrase.  The items included are obviously too lengthy to list here but let it be said that they cover the “kitchen sink”.

Before we get into this “guarantee” there are several items that find their way into enhancing the fee.  The owner pays for a portion of the firm’s annual insurance costs, to the tune of over a hundred thousand dollars (referred to in the contract as “Misc. costs”.  They also paid for a performance bond of almost two hundred thousand.  But what’s interesting, is that all the subcontractors provided their individual performance bonds.  Yes, that is insuring the performance twice!

The contingency is established exclusively and spent exclusively by the construction manager (the architect nor owner have any say in how much or how it is spent) and is considered part of the “cost of the work”.  And, this is not to be used for change orders.  Those monies would be in the individual sub contracts called “allowance contingency”.  They put the money by direction of the CM in their individual bids (buried if you will).

The field staff, which in this case is defined by four individuals costing over five hundred thousand, are part of general conditions.  So, prudence would say to put as much staff in the field as possible,  cost beyond the 3%.

So simply, the cost of the work, here has the subcontractors, general conditions (field staff) and any number of other misc. items to apply the 3% to.  Of course the bond cost, and the insurance cost is over and above.

In conclusion: The bottom line—Para. #5 “Owner will not share any savings below the GMP.  So, CMc’s get all the manpower paid for, all the bond and insurance, inflate the contingencies and exclusively control them and at the end keep what’s left.  This could be, of the money allocated by them for a contingency, well over seven hundred thousand in the example.

The other most accepted part of the pitch is “CMc guarantee the costs and take all the risk”.  When one considers that the guarantee does not come until all bids are in hand, the contingencies are over inflated, controlled by the construction manager and the performance bonds are carried by the subcontractors-what exactly is the risk and at that point the guarantee is virtually meaningless.

So, if you are inclined to drink the kool-aid of an apparent low fee and “we guarantee the costs and take all the risks” you might want to reconsider what you are embarking on.  What starts out as a 3% fee could well blossom into an 8% fee.  And the guarantee-well if anyone thinks a firm is going to put themselves at risk for this kind of money-naïve?