Question 2 of 6: Contract Administration — comparing four delivery approaches

Question 2: Contract Administration — comparing four delivery approaches (20 marks)

Question text not reproduced: the examination questions are © Engineers and Geoscientists BC. Open the official past paper (linked at the top of this page) to read the question, then follow the worked solution below.

The four approaches named by the question differ in one fundamental respect: how much of the project is defined before a price is fixed, and therefore who owns the consequences of what is not yet known. Everything else — suitability, risk allocation, and the cost and time of delivery — follows from that single variable. In Canadian practice each has a standard form behind it: CCDC 2 Stipulated Price Contract, CCDC 4 Unit Price Contract, CCDC 14 Design-Build Stipulated Price Contract, and CCDC 3 Cost Plus Contract.

Lump sum (stipulated price). The contractor undertakes the whole of a fully described scope for one fixed amount. It suits work whose design is complete and whose site conditions are well understood at tender — a building on a surveyed lot, a treatment plant with finished drawings, a repetitive structure where quantities can be taken off with confidence. The owner's cost risk is at its lowest of the four: the price is known before work starts and moves only through change orders, and competitive tendering pushes it toward the market minimum. The contractor accepts the estimating, productivity and pricing risk in full, and prices that risk into the bid as contingency and margin. The consequences are predictable: the tendered figure is usually the lowest of the four for a given scope, but the design must be finished first, so overall delivery is the slowest, and because every deviation must be renegotiated as a change, an owner who is still developing the design will find the lump sum an expensive place to make decisions. Adversarial claims are most likely here, since the contractor's only route to recovering an unforeseen cost is a claim.

Unit price. The contractor tenders a rate for each item of work — dollars per cubic metre of excavation, per linear metre of pipe, per tonne of asphalt — and is paid for quantities actually measured in the field against estimated quantities given at tender. This is the natural form for heavy civil and municipal work where the character of the work is certain but its quantity is not: roadway, earthworks, watermain and sewer, dredging, and remediation. In Canada the MMCD documents are drafted around it. Risk is split along that same seam: the contractor owns the productivity and pricing risk for each unit, the owner owns the quantity risk, and the owner therefore cannot know the final cost at award. Tendering is fast because only a bill of quantities is needed rather than a complete design, so delivery is quicker than the lump sum route; the trade-offs are a measurement and payment administration burden, and the classic exposure to unbalanced bidding, where a contractor loads the rates on items it believes are under-estimated and discounts those it believes will shrink. A prudent owner reviews rate spreads at bid evaluation and provides for renegotiation when a quantity varies beyond a stated threshold, typically fifteen or twenty per cent.

Turn-key (design-build). A single entity is engaged to design and construct, and hands over a facility ready for use — in the strictest form, complete with commissioning and start-up. It suits owners who can define performance rather than detail: process plants, industrial facilities, warehouses, standard commercial buildings, and any project where speed matters more than design control. The owner's risk position is the strongest of the four for cost and schedule, because a single party is responsible for the whole and design-construction interface errors have no one else to fall on, and the familiar defence that the drawings were deficient is unavailable to the builder. What the owner surrenders is control: fewer opportunities to influence detail, less transparency in how the price was built up, and a real risk that quality drifts toward the minimum the performance specification permits unless the specification and the owner's independent review are rigorous. Delivery is the fastest of the four because design and construction overlap and long-lead procurement can start early; the price typically carries a premium of a few per cent over a comparable lump sum, which is the cost of transferring the design risk.

Cost-plus. The owner reimburses actual cost — labour, material, equipment, subcontracts — and pays a fee that is a percentage of cost, a fixed amount, or a fixed amount with an incentive share. It is the form of last resort and of emergencies: fire and flood restoration, work in occupied or contaminated buildings, an urgent start on an incomplete design, or a scope genuinely impossible to define at the outset. Risk allocation is the mirror image of the lump sum: the contractor is essentially protected and the owner absorbs almost all cost risk. A percentage fee actively rewards inefficiency, which is why a fixed fee, or a guaranteed maximum price with a shared saving, is used to restore some incentive to control cost. The start is the earliest of any of the four, because work can begin as soon as there is something to build, but the final cost is unknown until the work is finished and it is generally the highest of the four; the administrative burden of auditing every invoice and timesheet is heaviest, and the owner's site staff must be capable of doing that auditing in real time.

Read as a set, the four form a spectrum of risk transfer, and the owner's real decision is where on that spectrum the project sits. Risk transferred is risk paid for: a lump sum buys certainty with a contingency embedded in the tender, and cost-plus buys speed and flexibility with an open cheque book. The professional judgement lies in matching the form to how much is genuinely known, and hybrids are common in Canadian practice precisely because most projects are not uniform — a lump sum building contract with unit rates for rock excavation, or a design-build contract with a guaranteed maximum price and a shared saving, allocates each risk to the party best able to manage it rather than forcing the whole project into one mould.