Construction Management Agreement

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A construction management agreement (CMA) outlines and formalizes the distinct roles, duties, and commitments of both parties during the contract period. It also specifies compensation and potential financial responsibilities for both parties. The content of a CMA can differ based on the extent to which the project owner wants to delegate authority over hiring and procurement to the construction manager. Broadly speaking, a construction agreement is created to safeguard the business interests of the construction foreman when he offers construction management to property owners.This post will teach us more about construction management agreements and their usage.

Agreement Type under Construction Management Agreements

A project owner and a construction manager can execute different construction management agreements. To ensure clarity and understanding, CMAs often adhere to recognized third-party frameworks. For example, the Canadian Construction Documents Committee offers standardized contracts (CCDC 5A and CCDC 5B) for CM as Agent and CM at Risk agreements, respectively. The types are as follows:

• CM as Agent: Under a "CM as Agent" agreement, the CM serves as an advisor and manager, while the owner signs contracts with trade professionals based on the CM's guidance.
• CM at Risk: Conversely, a "CM at Risk" agreement entails the CM directly contracting with subcontractors and assuming full project risk and liabilities.

Advantages of a Construction Management Agreement

• Defines Roles and Responsibilities: A construction management agreement (CMA) outlines the specific duties and obligations of both the project owner and the construction manager. It ensures that each party understands their respective roles, reducing the potential for misunderstandings and disputes.
• Establishes Project Parameters: CMAs set clear parameters for the construction project, including timelines, budget, quality standards, and project scope. By clearly defining these parameters, the agreement helps to keep the project on track and within the agreed-upon parameters.
• Allocates Risk and Liabilities: A CMA specifies the allocation of risks and liabilities between the project owner and the construction manager. It determines who is responsible for unforeseen events, delays, cost overruns, and other potential issues that may arise during the project. This allocation of risk helps protect both parties and ensures accountability.
• Determines Compensation and Payment Terms: The CMA establishes the compensation structure for the construction manager, including fee arrangements, payment milestones, and additional costs. It ensures transparency and fairness in payment terms, minimizing financial disputes.
• Facilitates Communication and Collaboration: A CMA promotes effective communication and collaboration throughout the project by formalizing the relationship between the project owner and the construction manager. It provides a framework for regular progress updates, change orders, and decision-making processes, ensuring that both parties are on the same page.
• Provides Legal Protection: CMAs offer legal protection to the project owner and the construction manager. The agreement helps to clarify rights, obligations, and remedies in case of contract breaches or disputes. It serves as a reference point in case legal action is required, minimizing potential legal risks.
• Allows Customization and Flexibility: Construction management agreements can be tailored to suit the project's needs. They can accommodate different construction management approaches, such as CM as Agent or CM at Risk. This flexibility allows for customization based on project requirements and preferences.
• Adheres to Standardized Procedures: CMAs often follow recognized industry standards and frameworks, providing a standardized approach to construction management. This standardization ensures consistency in procedures, documentation, and project execution, enhancing efficiency and reducing potential inconsistencies.
• Enhances Project Control and Oversight: A CMA enhances project control and oversight by defining the construction manager's authority and decision-making level. It provides the project owner with a mechanism to monitor progress, enforce quality standards, and ensure adherence to project specifications.
• Fosters Trust and Professional Relationships: A CMA builds trust and professionalism between the project owner and the construction manager. It establishes clear expectations, fosters accountability, and promotes a collaborative working relationship, leading to a smoother and more successful construction project.

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Disadvantages of a Construction Management Agreement

While construction management agreements (CMAs) offer numerous benefits, they also have potential disadvantages. It's important to be aware of these drawbacks before entering into a CMA:

• Complexity and Documentation: CMAs can be complex and require thorough documentation. The agreement may involve multiple parties, subcontractors, and detailed specifications. Managing the paperwork and ensuring compliance with all contractual obligations can be time-consuming and cumbersome.
• Potential for Conflict of Interest: CMAs can create a potential conflict of interest for the construction manager. In cases where the manager is responsible for selecting subcontractors or suppliers, there is a risk of biased decision-making or favoritism, which may undermine transparency and fairness.
• Lack of Competitive Bidding: In some CMAs, the project owner may not have the opportunity to solicit competitive bids from multiple contractors or subcontractors. It limits the potential for cost savings and may result in higher project costs compared to a competitive bidding process.
• Cost Uncertainty: CMAs may introduce cost uncertainties. While they allow for flexibility in project changes and modifications, these changes can impact the project's overall cost. Changes in scope, materials, or design may lead to additional expenses, potentially exceeding the initial project budget.
• Limited Contractor Liability: Under certain CMAs, the construction manager assumes an important portion of the project's risks and liabilities. It may reduce the contractor's accountability and incentive to mitigate risks, as they have shifted the burden to the project owner or other parties involved.
• Dependence on the Construction Manager: The success of a CMA heavily relies on the competency and performance of the construction manager. If the manager lacks experience, resources, or proper oversight, it can lead to inefficiencies, delays, or compromised quality, negatively impacting the project's outcome.
• Dispute Resolution Challenges: CMAs can introduce complexities in dispute resolution processes. When issues arise, determining responsibilities and resolving conflicts may be more intricate due to the shared decision-making and multiple parties involved in the agreement.
• Limited Control Over Subcontractors: In some CMAs, the project owner has limited control over subcontractors, as the construction manager may directly engage and manage them. It can reduce the owner's ability to enforce specific requirements or ensure compliance with quality standards.
• Compatibility with Traditional Contracts: CMAs may not align with traditional construction contracts, creating challenges in integrating and harmonizing different contractual obligations, terms, and conditions.

Key Terms for Construction Management Agreements

• Scope of Work: The scope of work outlines the tasks, activities, and deliverables the construction manager is responsible for.
• Compensation and Payment Terms: This term specifies how the construction manager will be compensated for their services.
• Duration and Schedule: The duration and schedule clause establishes the timeframe for the construction project and the construction manager's involvement.
• Change Orders: Change orders refer to any modifications or variations to the original scope of work or contract terms.
• Dispute Resolution: This term addresses how disputes or disagreements between the project owner and the construction manager will be resolved.

Final Thoughts on Construction Management Agreements

To ensure a successful CMA, it is crucial to carefully draft and review the agreement, paying attention to key terms such as the scope of work, compensation, schedule, change orders, and dispute resolution. Additionally, involving legal and industry professionals can provide valuable insights and help mitigate risks. A well-crafted CMA promotes transparency, reduces misunderstandings, and enhances communication and collaboration throughout the construction project. By establishing a solid foundation of trust, accountability, and clear expectations, CMAs contribute to the successful delivery of construction projects and the satisfaction of all parties involved.

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ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.