Chapter 4 — Key Takeaways

A one-page reference card. Keep it where you can find it before your next contract review.

Key Takeaways

  • A construction contract is a risk-allocation instrument with a price attached. The clauses decide who absorbs the unknowns; the price is what the market charges to absorb them. Change a clause and you change the price, whether or not anyone says so out loud.

  • Risk does not disappear when you assign it. It gets priced — and usually at a premium, because each bidder prices it independently and conservatively, and the owner pays whether or not the risk ever materializes.

  • A guaranteed maximum price guarantees the contractor's exposure, not the owner's cost. It caps what the contractor can charge for the scope defined the day it was set. Scope changes, design errors, differing site conditions, and allowance overruns all move the number, and the change mechanism is a one-way valve pointed up. Northgate: $47,500,000 guaranteed, $49,594,200 final — 4.4% over, on a well-run job, with nobody doing anything wrong.

  • The contract documents are a set, not a document: agreement, general conditions, supplementary conditions, drawings, specifications, addenda, modifications. Read the supplementary conditions first — that is where a standard form gets bent.

  • The four structures allocate four different risks. Lump sum: contractor owns quantity and productivity. GMP: contractor owns them up to the cap, with an open book and a savings split. Cost-plus: owner owns everything, and a percentage fee pays the contractor more when the job goes worse. Unit price: owner owns quantity, contractor owns productivity.

  • Cost of the work, general conditions, and the fee are three different buckets and the bucket decides who pays. Rule of thumb: if it would exist whether or not this project existed, it is fee. Self-inflicted rework is never reimbursable, on any form.

  • Every fixed price has four doors in it: allowances, alternates, unit prices, and contingency. Each is a legitimate tool and each gets abused about as often as it gets used well.

  • Time is a contract term with a dollar sign. Northgate: $5,150/CD extended general conditions plus $5,500/CD liquidated damages = $10,650/CD. Twenty-three days of slipped steel erection = $244,950.

  • Liquidated damages must be a reasonable pre-estimate of loss, not a punishment, or they are generally unenforceable — and the test varies by state. A well-drafted LD number traces back to a build-up.

  • No-damage-for-delay is the single clause that most changes your risk. On Northgate one 30-day owner-caused delay is a $154,500 difference. Read it before you bid.

  • Documentation, not cost, determines what a change is worth. Change order #14: $186,400 spent, $121,000 substantiable, $142,750 collected, $43,650 unrecovered.

  • Jurisdiction matters and changes. Pay-if-paid enforceability, retention limits, prompt-payment deadlines, anti-indemnity statutes, and lien-notice periods vary substantially by state. Check yours, and record the date you checked.

Action Items — do these on your job this week

  1. Find your contract's basis of payment and write one sentence stating exactly what is inside the guarantee and what is not. If you cannot, you do not know what you signed.
  2. Read the supplementary conditions cover to cover. Mark every place they modify the general conditions. That is your risk map.
  3. Find the differing site conditions clause. Confirm it exists and has not been narrowed.
  4. Search for "sole remedy" and "extension of time." That is how you find a no-damage-for-delay clause without reading 90 pages.
  5. Calendar every notice deadline today, in whatever system you actually check. Not next week.
  6. Compute your extended general-conditions daily rate (GC budget ÷ contract days) and add your LD rate. Write the total on the front of your project binder.
  7. Confirm the extended-GC rate is agreed in the contract, not left to be proven later. If it isn't, that is a negotiation you want to have now, not after a delay.
  8. On any cost-reimbursable job, open a separate cost code for self-inflicted rework on day one — so you can prove you never billed it.
  9. Check every allowance for whether it includes overhead, profit, and general conditions. One sentence now prevents a five-figure argument later.
  10. Flow it down. If you owe the owner 7-day notice, confirm your subcontracts require 5.

Common Mistakes — and the fix

Mistake What it costs The fix
Letting an owner believe a GMP caps their spend The relationship, in month fourteen Say the sentence at the conversion meeting, before anyone asks: "This caps what we charge you for this scope. Your budget is capped by your discipline."
Assuming the GMP contingency covers scope changes An emergency board meeting Carry a separate owner's contingency outside the contract, ~5% of construction value. Write the contingency-use provision explicitly.
Not reading the supplementary conditions Whatever the deleted clause was worth Read them first, every time. Standard forms are only standard until somebody edits them.
Missing a notice deadline The entire value of a valid claim Calendar every deadline at contract execution, not when the problem appears.
Accepting no-damage-for-delay without pricing it $154,500 on one 30-day delay at Northgate rates Price it, negotiate a carve-out above a threshold, or decline the job. Do not rely on the judicial exceptions.
Leaving "cost of the work" undefined on a cost-plus job ~$46,000 on a $2.2M renovation Attach a schedule of reimbursable and non-reimbursable items, a labor burden rate, and an equipment rate schedule.
A percentage fee instead of a fixed fee $95,880 on a job that went 56% over Convert the fee to dollars at execution. Adjust it by agreement when scope changes.
Reporting cost-to-date instead of cost-to-complete The overrun you find out about after it happens Monthly forecast to completion by cost code — Chapter 28.
Silence on whether an allowance carries markup $5,600 on a small allowance, $200,000 on a big one One sentence, at execution.
Front-loading the schedule of values You starve in month fourteen; your surety reads your WIP Value each line honestly, with a disclosed allocation of mobilization and general conditions.
Treating unit prices as a place to express a hunch A rejected bid and a damaged agency relationship Defend every unit price with a takeoff and a production rate. If you can't say it out loud to the chief engineer, don't submit it.

Decision Framework — choosing a pricing structure

Start with the biggest unknown, not with a preference.

  1. Is the design complete? - Yes, and the market is competitive → lump sum (hard bid on public work, negotiated on private). - No → go to 2.

  2. Do you need a price cap before the design is finished? - Yes, and the owner has staff or an owner's rep who can audit an open book → GMP under CM at Risk. - Yes, but the owner has nobody to audit → hire the owner's rep first, or wait and use a negotiated lump sum.

  3. Is the scope so undefined that even a GMP cannot be priced? - Yes → cost-plus with a fixed fee, plus all four controls, plus a written conversion trigger to a GMP at ~70% construction documents. Never a percentage fee.

  4. Are quantities the real unknown, and is the work measurable in repeating units? - Yes → unit price, with a variation clause and a field measurement protocol you actually staff.

Then, whichever you chose, answer these seven before you sign:

  1. What exactly is inside the guarantee, and what is not?
  2. Is there a differing site conditions clause, and was it edited?
  3. Is there a no-damage-for-delay clause?
  4. What are the notice periods, and are they calendared?
  5. Are liquidated damages tied to a time-extension mechanism and an exclusive remedy?
  6. Is the consequential damages waiver mutual and intact?
  7. What is the agreed extended general-conditions daily rate?

If you cannot answer "who owns this risk?" about any part of the job, you have just found the thing that is going to hurt you.