Owners are increasingly considering alternative project delivery methods such as engineer-procure-construct (EPC), design-build, and construction manager/general contractor (CM/GC). While the advantages and disadvantages of the EPC method were discussed in a previous post, my personal experience lies more with CM/GC contracts. There are a variety of advantages and disadvantages to CM/GC, but in my experience it is extremely important for owners to realize that it is not in your best interest for the CM/GC to self-perform a high percentage of the work.
The Problem with High Levels of Self-Performed Work
In most instances, the CM/GC entity will self-perform at least one of the project trades. For example, when building a new maintenance facility they might self-perform the earth work, which would only account for a small percentage of the total contract. This leaves the majority of the remaining work (electrical, plumbing, etc.) to be completed by subcontractors.
CM/GC contracts generally include a Guaranteed Maximum Price (GMP). The contractor manages the project quality and cost to stay within the GMP. For each dollar the final cost comes in below the GMP, they may receive a percentage of the savings. This “bonus” is an incentive to drive subcontractor costs down while simultaneously managing quality. This arrangement works well, but only when the CM/GC performs a small percentage of the work.
Problems arise as the amount of self-performed work increases. When this happens, the contractual incentives to operate in the Owner’s best interest begin to fade. This can create a situation of the “fox watching the hen house”. Why would the CM/GC pinch their own profits to stay under the GMP when they may only receive a small percentage of the savings? By self-performing much of the work and driving construction costs up to the GMP, they will likely see increased revenue and profits. There may also be incentive to retain much of the work in-house in order to keep their internal crews fully utilized if they do not have other work available.
Use the Contract to Protect Your Interests
There are multiple ways to combat too much self-performed work, but the best way is to use the contract to protect yourself. For example, you may consider specifying a limit to the maximum allowable percentage of self-performed work. If the CM/GC exceeds this percentage, a penalty can be applied, such as the owner paying a discounted price for self-performed work beyond the specified maximum.
Another option is to create a sliding scale on the percentage split of savings for bringing the project in under the GMP. For example, if the CM/GC self-performs 10% or less of the work, they may receive 50% of the cost savings under the GMP. If the self-performed percentage increases to 20%, their share of the savings could go down to 25%, and so on.
These are just two options for wielding the contract to protect your interests.
CM/GC contracts certainly have their place in the industry and can be very successful, but too much self-performed work can put owners at risk. To protect yourself, utilize contractual provisions that discourage the contractor from self-performing too much of the work. By doing so, you’ll put a chain around the fox’s neck so it can’t reach the hen house.
What has been your experience with CM/GC contracts? Where have you found successes and lessons learned? I’d love to hear your experiences.
Photo credit: Adobe Stock / Eric Isselee