Construction Contract Types and Risk Management Flashcards
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Read the first 7 Construction Contract Types and Risk Management flashcards as text
Under a Guaranteed Maximum Price (GMP) contract, what happens when actual project costs fall below the GMP?
Answer: Savings are typically shared between owner and contractor per a agreed ratio
GMP contracts commonly include a shared savings clause where cost underruns are split between owner and contractor according to a pre-negotiated percentage.
Which contract type is most appropriate when the project scope is well-defined, design is complete, and the owner wants maximum price certainty?
Answer: Lump sum (fixed price) contract
Lump sum contracts are ideal when scope is fully defined because the contractor bears cost risk and the owner gains price certainty.
A subcontractor 'flow-down' clause in a construction contract serves what primary purpose?
Answer: Passes prime contract obligations and liabilities down to subcontractors
Flow-down clauses ensure subcontractors are bound by the same terms and conditions that govern the prime contract, maintaining consistent obligations throughout the project.
In construction risk management, what is the primary purpose of a project contingency allowance?
Answer: To absorb unforeseen costs and uncertainties within the defined scope
Project contingency is reserved for unknown-unknowns and uncertainties within the existing scope, not for scope additions or contractor profit.
Which construction contract delivery method transfers the most design risk to the contractor?
Answer: Design-Build (DB)
In Design-Build, the contractor is responsible for both design and construction, bearing design errors, omissions, and coordination risk.
What is the key audit concern with 'open book' cost-plus contracts?
Answer: The contractor has little incentive to control costs
Because the owner reimburses actual costs plus a fee, the contractor has limited incentive to minimize expenses, making cost control auditing critical.
A construction contract's 'no damage for delay' clause primarily benefits which party?
Answer: The owner
No damage for delay clauses protect the owner by limiting contractor monetary recovery for owner-caused delays, restricting remedies to time extensions only.