What are Preconstruction Services Agreements?
A Preconstruction Services Agreement (PCA) is precisely what it sounds like: a contract between the owner and the contractor to establish the services the contractor will provide before construction begins. When used along with a feedom of contract funds in place, it formalizes the scope of those preconstruction services and the corresponding compensation. Even for small projects, where the parties may not be particularly concerned with formalities, a PCA is oftentimes the best practice when there will be any significant scope of preconstruction-related work. For larger projects, it is rare that a contractor will accept on a "no cost" basis preconstruction services without first setting up some manner of compensation mechanism , even if only estimated at a later date. So there is rarely a good reason to avoid a PCA.
The question then becomes: what are those preconstruction services for which a contract is warranted? Obviously, this could range from the simple (i.e., examining bidding parties, or securing bonding) to the complex (i.e., conducting value engineering reviews, or preparing design documents). Even on the small project, a PCA may be warranted for a variety of tasks – tasks which can be time-consuming and distinctive from bid and contract preparations down the line. The intent of the PCA is to have the compensation terms for these tasks clearly defined, thereby eliminating the risk of contractual disputes later on.
Typical Elements of a Preconstruction Services Agreement
Within any preconstruction services agreement, you will likely find very specific clauses outlining the exact scope of services that will be provided. This generally covers everything from the basic duties the contractor will perform while working with the owner to the timeline for completion of preconstruction and financial matters, such as how the cost of those services will be billed and when payment is due. A project schedule that sets forth time of performance starting with the initial site visit, well before any formal preconstruction services agreement is signed, up through the finalization of a guaranteed maximum price or some other type of fixed cost agreement. The parties’ respective responsibilities for performing the work during preconstruction, including who reviews and evaluates alternates, develops the design and construction schedule, provides subcontractor RA and trade payment information, updates the GMP or other financial arrangements, obtains permit and scope of work clarifications, conducts schedule value forecasting and performs quality control and code inspection. Determination of fee for services based on general overhead and profit per the preconstruction services contract amount, or for a lump sum fee, define the billing process, schedule of values schedule and use of the AIA G702 Application for Payment.
Advantages of Preconstruction Services
For both the contractor and client, these services enhance overall project work. The information acquired through preconstruction services allows the contractor and client to develop a project plan that is more streamlined than if no preconstruction had occurred. For the client, the benefits of these services include: Properly conceived and executed preconstruction services provide clear-cut advantages for the client and the contractor. These advantages eventually lead to more accurate bidding documents, reduced risk, improved safety performance, appropriate phasing, adherence to the project schedule, and completion of the project within the budget.
Common Pitfalls and Remedies
"Can this thing ever lead to a dispute?" and "What happens when a preconstruction services proposal is not honored?" are questions that I hear all the time (and answers to these questions are in this Guide). Disagreements stemming from preconstruction services agreements or proposals are the most common type of construction litigation. And, they run the gambit from pricing disputes to contract interpretation disputes to just plain "I don’t remember that". Effective and regular communication are key in overcoming (or avoiding) these disputes. Of course, it is equally important for all parties to have their expectations well defined and honored in the preconstruction services agreement or proposal. But, things do happen that can lead to a misunderstanding or a dispute over a preconstruction services proposal. So, the first line of defense is regular and effective communication.
That means nothing is left to chance: as the AIA Contract Document Committee notes: Why not address the scope of preconstruction services services and what is going to be done during preconstruction? Realistically, a General Contractor cannot list every preconstruction services and every budgetary amount that will be developed in the future. But, a good start includes a brief description of the scope of the preconstruction services and the cost range for the preconstruction services (see for instance the AIA A133-2009 document). This establishes clear communication with the Owner up front.
Of course, communication and expectations can change during preconstruction (this is likely to happen when the Owner does not know much about how long design and shop drawings take), which is when the second line of defense comes into play. If the Owner is expecting the Design/Bid/Build approach, versus a Construction Management/CM@Risk/Design-Build approach, then the Owner is going to face increased project costs and maybe even scheduling challenges when the budget does not meet the Owner’s expectations based on the original preconstruction services proposal. The design team may need to make adjustments to the documents and the Owner may need to allocate more money to the cost of the work. These are challenges and risks the Owner will experience if there is not active communication and collaboration between the Architect and Owner.
Finally, there may be some things that happen during preconstruction that are outside the control of either party. For example, late changes to the plans and specifications can be a problem for the Architect, as it typically means having to incur additional time and costs to revise the documents and then reconsider time, cost and scheduling on the part of the General Contractor. All of these activities that fall within the realm of "preconstruction" are discussed in the Guide on pages 87-89.
Selecting the Appropriate Preconstruction Services Provider
Selecting a competent provider of preconstruction services requires first asking whether the provider has a reputation for understanding and meeting expectations and, second, making a judgment as to whether experience with a provider is likely to produce a positive outcome. Accomplishing these two objectives requires a combination of research, meetings with prospective providers, and interviews of individuals who have worked with the providers being considered. It’s also wise to avoid providers whose reputation for litigation far exceeds the reputation for good service and who otherwise give every indication that the provider has no intention of becoming a partner in the fulfillment of the client’s goals.
Almost universally , those who have had experience working with an appropriate preconstruction provider recognize the value of such an experience and the performance of an organization that brings collaboration to the table. Since few projects are likely to be undertaken more than once or twice over the span of one or two generations, it’s best to take the time to know as much about a prospective preconstruction services provider as possible prior to entering into a significant contract or an exclusive letter of intent. It is also wise to focus on a provider’s home ground, i.e., experience with local project challenges and the ability to secure favorable project financing with local lenders or institutional funders who can be convinced to see the project through. Being willing to pay a market rate for these services up front will also help to ensure that objectives are shared and a collaborative approach to succeeding in achieving them is the result.
Legal Considerations in Preconstruction Services Agreements
The legal aspects of a Preconstruction Services Agreement are just as important as the cost of the work to be performed, and often times much more difficult to comprehend. A party entering into a Preconstruction Services Agreement should be aware of the enforceability of the Preconstruction Services Agreement. In particular, the use of additional documents as a means of creating a binding contract is a frequent problem. For example, the sending of a proposal is usually not considered an enforceable offer, rather it is treated as an invitation to negotiate. Without an agreement to the contrary, the receipt by an offeror of a signed document may not create a contract unless there is evidence that both parties intended to be bound at that stage. A promisee might accept a unilateral offer by the return of an unsigned counterpart of the offer, but only if a reasonable person would have believed that an acceptance of the offer had occurred. Accordingly, a well-crafted Preconstruction Services Agreement should set forth in writing (and any additional documents which the parties agree to bind themselves under) a clear expression of intent on the part of the parties to enter into an immediate legally binding relationship, conditional only upon the performance of the contract.
Consideration must also be given to the allocation of financial liabilities in the Preconstruction Services Agreement. The Agreement should be carefully drafted to conform with any applicable limitation of liability statute. Unqualified damages for breach of contract or negligence are too risky for the owner/purchaser. A narrowly drawn release or a limitation of liability clause is an important element of a risk management plan. A release permitting the other party to indemnify is an important element here. One key exception to these limits can be a provision allowing for recovery of reasonable attorneys’ fees for the prevailing party in the event of a dispute. The lawyers who review and advise on Preconstruction Services Agreements should be skilled in construction law.
From a contractual perspective, the Preconstruction Services Agreement should be clear in its intent. In order to achieve its objective, the Agreement should address the following: (1) scope of services; (2) compensation; (3) timeline; (4) standard of care; (5) insurance; and (6) alternates. Should there be a prescription for such matters in any other documents, the Agreement should indicate that the services are subject to the terms of those documents. As noted above, the key from a practical standpoint is to balance the degree of general information required (to comply with contract documents at the time the contract is signed) and the degree of specificity (to minimize change orders subsequent to contract execution).
Preconstruction Services Agreements typically provide for the following model of operation: (1) the architect draws up a set of drawings upon which the project will be based; (2) the contractor, whose expertise lies in the construction and implementation of the projects, identifies the basic cost estimate; (3) the owner examines all this information and, accordingly, decides whether to proceed; and, depending on the findings, further alternatives can be developed.
Future Trends in Preconstruction Services
The rapid pace of technological advancement is reshaping the construction industry. Increasingly, technology will drive the preconstruction services sector and provide tools to improve efficiency. Programme management software is a key example of essential technology during the construction process. The value of programme management software lies in its ability to stage the project, produce and control the project budget and help project management teams plan construction activities. It allows for increased productivity, and therefore improved accuracy and better cash flow management. Building Information Modelling (BIM) is another major development and will increasingly be used in the design of construction projects. Project Lifecycle Management software is also able to facilitate the handover and administration of the completed project. Essential tools such as these provide a breadth of experience early on in the construction process which helps avoid messy poorly funded remedial works later on .
Preconstruction aim to reduce risk, promote accuracy and ensure that the project can be delivered on time. These methods will be increasingly embraced by preconstruction service providers. Early start, or early procurement, systems allow work to begin before the main contract is signed, therefore enabling construction to begin sooner. Design Management professionals lead the overall integration, and coordination, of the design process, allowing for detailed building models to be developed prior to construction. This is a model that significantly benefits from a co-ordinated approach taken and importantly by fully engaging a specialist team of design consultants. Rather than a change in the way preconstruction services are currently delivered, these approaches are a refinement of those already established. To achieve the full benefit, these methods are critical when they are used as part of an integrated management system that considers the whole of project life and by a specialist team of preconstruction services professionals that are fully engaged with the main contract.