Construction contracts in the real world 1

CONSTRUCTION CONTRACS IN THE REAL WORLD

Austin Petersen

3/28/19

GSW 1120

Bowling green state university

Construction contracts in the real world 2

My research is on construction documents. Specifically, I am looking into construction

contracts and how work. I have down the majority of my research through the school library

where I could find scholarly sources and research that has been peer- reviewed. Through my

research I learned about different techniques to look at the contracts, what makes up a contract,

and the different types of contracts in the industry. Contracts have been around in the

construction world ever since people started to build for others and not just themselves. The

contracts are needed to make certain that the builders get paid, they finish on an appropriate time,

and the builders are held accountable for the quality of work that is done. These contracts are not

always written down in order to prove what was said, sometimes verbal contracts will worked

and have worked. Construction contracts is a good way to help the building of a project go as

smoothly and efficiently as possible by holding the people involved accountable for what was

agreed upon prior to the building process.

Contracts make the project run for efficiently and smoothly by creating a clear agreement

between the different parties. I found through research on the balancesmb article and the

Fortneylawgroup article a lot about the different types of construction contracts in which are

used for different types of projects or situations. There are four main written contracts that are

the documents that most project managers go to when they want to make a written agreement

between the builder that the buyer. The first is a lump sum or fixed price contract. These

contracts involve the total fixed price for all construction activities. They are primarily used

when a clear scope and a defined schedule has been mutually agreed upon. The second type are

cost plus contracts. These contracts are more specific to each payment or expense made when the

project occurs. They are used when the scope is not clear, and it is the owner’s responsibility to

establish some limits on how much the contractor will be billing. The benefit of this contract is
Construction contracts in the real world 3

that the owner is not paying for any more than he/she has to, but in return they have to do a lot

more supervising due to the difficulty of tracking the expenses and such. The third type of

contract is a time and material contract which are used when the scope has not been defined. The

contract will include a hourly or daily rate including additional expenses for change orders. The

forth contract is a unit pricing contract which is used for the ease of adjustability during change

orders. The contract set a price on the units such as each piece of wood or cinder block. If the

scope changes It becomes very easy for the owner and builder to reach an agreement for the new

price.

In the second source “fortneylawgroup”, the article adds on to just the different types but

a little more about verbal contracts. They verbal contracts are enforced, but just like you would

think, a verbal contract doesn’t present a clear record of what was agreed upon. When there is a

problem the verbal contract is subject to the party’s recollection of the terms which can be

manipulated. Both the sources portray the same information about the different types of contracts

in which makes both the sources more reliable because they are saying the same thing.

Knowing how to negotiate a contract and being prepared will save you headaches and in

the future. Negotiation is aloud due to the fact of most construction being in the private sector.

Some job dealing with the government cannot be negotiable, but rather come down to the

bidding process. The bidding process happens when the buyer wants something down. Let’s use

a road for example, the buyer will say what they want, and it will to a public bidding in which

many contractors will compete with each other on who can perform the job better. The factors

that go into who can perform better would include the quality of work which would come from

reputation, who comes out to be the cheapest option, and who can finish the job the fastest.

From looking through the articles “How to become a successful contract negotiator” &
Construction contracts in the real world 4

“Understanding construction contracts” I found some good information on the topic of

negotiation. They both talked about the law behind the negotiation and the main no-no for the

contracts is if the job calls for competitively placed bids, negotiation isn’t permitted. However, if

the public sector does not require a competitive bid than it is open range for the contractors to

negotiate with the buyer. The articles also gave some insight on how to properly use your

negotiation skills to get the best deal possible. This includes setting your goals as to what you

want to get out of the contract prior to the negotiation. This also includes never backing down

on past earned rights. By this I am talking about once you get to a point in the conversation

where you are getting what you want and they try to take back what they have already offered

you by saying for example “ If you bring the concrete slabs back down to one hundred dollars

per ton, I while give you an extra week to finish the project.”. In this case the one negotiator

wants to take back what they already agreed on by giving the contractor something else he

wants. This usually will never work in the contractor’s perspective even though they may be

tricked into thinking as such. Overall being able to negotiate properly in the construction world

can be the difference on making millions on a job or coming out in a loss.

Another big portion of the construction contract world is knowing if it’s a good or bad

time to take a job. Calculating risks in this industry can make all the difference on the success

and the company. I found an article called “Construction contracts: the cost of mistrust”. In this

article they talk about the risk involved in making contracts. Some of that risk being liability of if

something goes wrong, who will that fall upon. To calculate this problem contractors may use

risk allocation through disclaimer clauses to help guide them in the right direction as far as what

jobs are worth taking and which ones aren’t. Below is a document to explain what the risk

allocation process looks like.

Construction contracts in the real world 5

With risk comes trust and trust is sometimes hard to find in the industry. The reason for

contracts in the first place is because “in the absence of trust in business relationships, there is a

significant need for good and powerful control system to manage and administrate the

contracting process.” Contracts are what takes a lot of the risk out of the deals.

Another part of calculating risk is using graph and data to find the best decisions. I

gathered an example histogram form the article to show what these graphs look like in the real

world. Below is a histogram of magnitude of the real risk in relation to the size of the

contract/cost
Construction contracts in the real world 6

The article splits trust up into three different categories blue, yellow, and red. Blue is

competence or trusting them to do the job. Yellow is integrity or if they can consistently take

care of the interests of the contractor. Red is intuitive or rather how the person feels about the

other. If the relationship doesn’t feel right, there will be no trust. This goes hand in hand with the

construction documents which are pretty much a baseline as to what has to in the contracts. This

take a lot of the trust out of the equation leaving less to chance on whether the general

contractors will do what they agreed upon. The article “Financial Risk estimation in Construction

Contracts” says similar thoughts on the subject. The article talks about the relationship between

the size of the contract to the degree of risk. To sum this up, there will always be risk in

contracting out work, but when the right provisions are put in place risk can be put to a

minimum.

In conclusion, contracts in the world of construction is what makes the industry a success

and plays a part into what makes the jobs run smoothly without lawsuits or problems. Contracts

take the trust between the owners and the contractors carrying out the work. Calculating the risk

involved with a contract can make the world of a difference and being able to negotiate said

contracts can put more money in the pockets of either side. All in all, I learned a lot about what

makes up a construction type contract and what goes into making everything run smoothly.
Construction contracts in the real world 7

References

Rodriguez, J. (2018, October 22). Common Construction Contracts for Your Product or Project.

Retrieved March 28, 2019, from https://www.thebalancesmb.com/common-types-of-

construction-contracts-844483

Rodriguez, J. (2019, March 10). Follow These Rules to Become a Great Contract Negotiator.

Retrieved April 3, 2019, from https://www.thebalancesmb.com/how-to-become-a-

successful-contract-negotiator-844810

Surahyo, A. (2018). Understanding construction contracts: Canadian and international

conventions. Cham: Springer.

Fortney, M. L. (n.d.). Construction contract basics. Retrieved March 28, 2019, from

http://www.fortneylawgroup.com/faqs/Components-of-a-Written-Negotiated-

Construction-Contract.html

Valentinas, P. (2010). COMPLEX EVALUATION OF CONTRACTS FOR

CONSTRUCTION. Retrieved March 28, 2019, from http://tinyurl.com/yxfmxlk3

Zaghloul, R., & Hartman, F. (2003). Construction contracts: The cost of

mistrust. International Journal of Project Management, 21(6), 419-424.

doi:10.1016/S0263-7863(02)00082-0
Construction contracts in the real world 8

Annotated bibliography

Surahyo, A. (2018). Understanding construction contracts: Canadian and international

conventions. Cham: Springer.

This article goes over everything to do and related with contracts in the construction

world. It goes into detail on the basic law that is used when the contract is formulation to

bidding procedures to disputes when a contract is not is agreement. To sum up the point

of the article, I would say it is the basics of what one needs to know to understand the

world of construction contracts. This article will be helpful to my project by giving me

information on the law behind the contracts themselves. The students will find the

authors style very boring and hard to understand.

Valentinas, P. (2010). COMPLEX EVALUATION OF CONTRACTS FOR

CONSTRUCTION. Retrieved March 28, 2019, from http://tinyurl.com/yxfmxlk3

This article goes over the relationship between a successful contract negotiation and

being prepared for the negotiation prior to actually making a contract. They talk about

something called the complex evaluation. The complex evaluation is a group of methods

used to assess and develop contracts. This will help me to understand how people in the

industry view the contracts from their perspectives.

Construction contracts in the real world 9

Zaghloul, R., & Hartman, F. (2003). Construction contracts: The cost of

mistrust. International Journal of Project Management, 21(6), 419-424.

doi:10.1016/S0263-7863(02)00082-0

After reading through the main topics in this article, I found that the article focuses on

numbers. They talk about the calculated risks needed in order to make successful

contracts. There is a lot of mistrust when dealing with others in the industry, so the article

goes into detail on how to make the best of the mistrust. The article will be used to

explain the risk involved through my paper. The students will find the text long but

understandable.

Fortney, M. L. (n.d.). Construction contract basics. Retrieved March 28, 2019, from

http://www.fortneylawgroup.com/faqs/Components-of-a-Written-Negotiated-

Construction-Contract.html

The article consists of the basic of construction contracts. The writer elaborates on things

like verbal agreements and the risk that comes along with them. The article gives insight

of the different types on contracts and the difference between each. The pros and cons of

one contract over the other. Negotiation is elaborated on quite a bit in this article as well.

I can use this article to help me explain every little thing that makes a contract work. The

website is easy to use and easy to read for the students.

Rodriguez, J. (2018, October 22). Common Construction Contracts for Your Product or Project.

Retrieved March 28, 2019, from https://www.thebalancesmb.com/common-types-of-

construction-contracts-844483
Construction contracts in the real world 10

This article goes into better detail than the other sources as to the four common types of

contracts that are mainly used throughout the industry. At the beginning, a summary of

each type is given and as you scroll onto the rest of the article you will find more in-depth

information as to what the types are and when they are used. I can use this article to

explain the different type of contracts in my paper. The writer made the article very

intuitive and easy to find information.

Rodriguez, J. (2019, March 10). Follow These Rules to Become a Great Contract Negotiator.

Retrieved April 3, 2019, from https://www.thebalancesmb.com/how-to-become-a-

successful-contract-negotiator-844810

This article gives information on what it takes to become successful in the world of

negotiating contracts. The writer goes over the skill and characteristics of a good

negotiator and how to acquire them. The writer does this by giving a chart of different

tips and reasons as to why the tips work. I will use this article to explain the art of

negotiation and how it is used in the industry. The writer made the article very much in

order with a simple list as to what his tips were.

Construction contracts in the real world 11

http://tinyurl.com/yy7mtteb

http://tinyurl.com/yxfmxlk3

http://tinyurl.com/y5cyc4no

https://www.thebalancesmb.com/common-types-of-construction-contracts-844483

http://www.fortneylawgroup.com/faqs/Components-of-a-Written-Negotiated-

Construction-Contract.html

https://www.thebalancesmb.com/how-to-become-a-successful-contract-negotiator-

844810