This document discusses different construction project delivery and payment models. It begins by outlining common delivery models like design-bid-build and design-build. It then explains different payment methods that can be used like fixed price, unit prices, and cost-reimbursable. The document also discusses pricing strategies and how they relate to risk transfer between parties. It provides details on collaborative models like early contractor involvement and discusses selecting the optimal contract based on a client's project risks, desired influence, and market conditions.

1. What are we talking about?
Anna Kadefors
Professor of Real Estate Management at KTH Royal Institute of Technology, Stockholm
Guest Professor at Chalmers University of Technology, Göteborg

2. Presentation outline
• Delivery models: Design-Bid-
Build, Design Build,
• Payment methods: fixed price,
unit prices, cost-reimbursable
• Pricing strategies and risk
• Early Contractor Involvement
• Other collaborative/relational
contracting models
• Selecting the contract

3. Delivery models
• Design-Bid-Build: the client hires
consultants to develop a
detailed design before the
contractor is procured.
• Design-Build: the client procures
the contractor based on
performance/functional
requirements and the contractor
hires consultants to develop the
design
• Design-Bid-Build: the client hires
consultants to develop a
detailed design before the
contractor is procured.
• Design-Build: the client procures
the contractor based on
performance/functional
requirements and the contractor
hires consultants to develop the
design
3

4. Payment/pricing methods
4
Two principles:
• Price-based
The price is set in competition by the market
• Cost-based
Payment is based on actual costs
• In practice often combined

5. Payment
principles 1:
price-based
• Lump sum/fixed price: the client pays a fixed
price for the whole contract. Cost risk with
contractor.
• Schedules of rates, unit prices,
remeasurement: contractors tender fixed
prices per unit of work or activity. Cost risk is
shared.
5

6. Payment
principles 2:
cost-based
• Cost reimbursable (for construction): the contractor
is reimbursed for actual costs. Cost risk with client
(Also called prime cost principle)
• Guaranteed maximum price (GMP): the contractor
is reimbursed for actual costs up to an agreed
maximum price
• Incentive contracts with gainshare/painshare
formula (target cost contracts): A cost reimbursable
contract where cost overruns and underruns
relative to an agreed target cost are shared. Cost
risk is shared.
6

7. Gain shared to be
shared
7
Payment model: target cost contracts

8. 8

9. Pricing strategies and risk
• Lump sum contracts: competitive tendering for
basic contract – risk for winner's curse
• Changes/variations priced in monopoly (claims)
➢Contractor strategy: bid low – claim high
➢Client strategy: monitoring, suspicion
➢Costs and conflicts increase when uncertainty is high
(many changes = many conflicts)
• Contractors will price risk – can be expensive
• So if there is uncertainty all contracts will be
either high risk or very costly for clients

10. ▪ Relationship-building activities – workshops etc
▪ Partnering charter with joint goals
▪ Communication to support creative interaction
▪ Joint risk management
▪ Systems for following up goals and collaboration
▪ A conflict management system
▪ Often: Monetary incentives (”carrots” for collaboration and
innovation), open books
Collaboration models - activities and systems
10

11. ECI – Early Contractor
Involvement
• Most common interpretation (?):
bilateral two-stage open book
contracts with collaborative measures
and contractor selection on soft
parameters
• But also refers to alliances with
multiparty contracts and collaborative
measures (f ex PPC2000 in UK)
• Or just to involving contractors early
without collaborative measures
11

12. Early Contractor Involvement (bilateral)
Two-stage process
Phase 1:
- Often cost plus payment
- Develop budget/target cost
- Go/NoGo
Phase 2:
- Target cost contract with
gainshare/painshare
- Or cost reimbursable with fixed part
- Or fixed price
12

13. International trend: inspiration, imitation and translation between contexts

14. Other collaborative models and labels
• Partnering – US, UK, DK, SW…
• Can refer to any collaborative relation
• Or to collaboration within traditional contracts
• Or to two-stage open book tendering plus collaborative measures
• And more…
• Alliances – Australia, UK, Finland
• Multiparty contracts
• Can also siginify any collaborative relation (cf strategic alliances)
• Integrated Project Delivery (IPD) – US and other countries
• Originally multiparty contract, but now wider term
• Related to lean and VDC
• Framework contracts involving multiple projects (UK: FAC1)
• Various local models: Bouwteam, etc.
• (Relational contracting, collaborative contracting, supply chain management)
• Labels change meaning between context and over time in the same context

15. Reasons for using early contractor
involvement
• There is uncertainty in the project (geology, existing structures, external
actors, user demands, complexity in requirements, re-use of material…)
• The client wants to influence detailed design beyond traditional contracts
(architecture, labs, etc.)
• Benefits of including construction competence in design (constructability,
optimizing for carbon reduction, etc.)
• To get tenders – contractors prefer low-risk contracts
• Industry attractiveness and recruitment (less stressful, more learning)
• Lean client functions
• Everybody does it, test something new

16. Trust and control
• Calculus-based trust
• Contracts
• Reputation effects in small markets
• Relational trust
• Based on actual interaction
• Selecting contractors with high collaborative
competence
• Collaborative measures to build trust at project
level – social control
• Institutional trust
• Informal shared understandings at industry level
• Certifications of companies, standard contracts,
certified training

17. Some takeaways
• You can’t have your cake and
eat it
• Don’t assume that others use
label/terminology in the same
way as you
• It’s not only about selecting a
contract for a project, it’s an
industry learning process

18. Client’s choice of procurement strategy
• Which risks are there and which party can control
them?
• How much influence does the client wish to have over
detailed design?
• Client competence and resources for procurement
and contract management
• Time pressure
• Market aspects (competition): how many contractors
have the necessary competence and how many will
be interested in submitting a tender?
18