How To Create Construction Documents

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Colossal County Hospital was coming apart at the seams. With dozens of newly hired doctors, nurses, and technicians, millions of dollars of equipment on the road, and patient appointments backed up for months, the new facility was impossible to use. For one thing, construction wasn't finished, and much of what was complete was faulty. Worse yet, the contractor had placed liens on the property for nonpayment, preventing occupancy. Costs had greatly outdistanced available financing. The hospital staff was frantic; the bank was apoplectic; the board of trustees was in despair.

How had it happened? The chairman of the board—head of the local branch of a financial services company—was baffled. He tried to trace the history of the project.

Two years earlier, the board members had voted to build an important new facility and renovate an adjoining older one. They hired the best available hospital architect. One group of trustees went on to focus its attention on a special bond issue to provide low-cost financing, while another group put together and executed a detailed marketing strategy to position the hospital as a world leader in several areas of care and research. Working closely with the doctors who would direct the various programs, the architect designed a state-of-the-art medical facility and a splendid building that would serve as a symbol for the hospital and as a landmark for the city.

On the architect's recommendation, a local contractor was retained to begin pricing the preliminary plans. As the drawings and budgeting progressed, the hospital was confident enough to apply for bank financing, and the bank, on the basis of the contractor's estimates and the proposed bond issue, agreed to make the loan.

Then the contractor presented his final budget. To the board's surprise, the estimate had grown by $3.5 million—and the detailed construction drawings still weren't complete. The contractor claimed the architect was upgrading the quality and scope of construction. The architect insisted he was only complying with the growing wish list of the trustees, doctors, and marketing experts hired by the board. But the bond issue was based on the original budget, and it wasn't big enough to accommodate the higher price. The hospital could not proceed. The trustees and the doctors held a meeting.

The doctors insisted they had added very little, and they refused to eliminate any of the medical features designed into the building. The trustees were convinced that the overall increase in scope was much smaller than the new price indicated. Everyone suspected the contractor of taking advantage of the hospital. The chairman decided it was time to act.

"In my industry—financial services," he reasoned, "all services are bid for. We give all aspirants a chance to say what they will charge. That's the way to get the lowest price."

A local manufacturer on the board agreed. "I had one of these 'trust me' contractors do my warehouse on a time-and-materials basis, and he soaked me good. He put his worst workers on the job, he didn't fight for purchase discounts, and he did everything he could to get costs up so his fee would go up. Let's not make the same mistake I made."

So the project was put out to bid with no modifications in scope and still without completed blueprints and specifications. Five companies submitted bids. The hospital's chief financial officer awarded the contract to a builder whose price was within the original budget. The original contractor was banished in disgrace, despite his protestations that his estimate was the right price for all the work the hospital would need.

Conflicts developed at once. The new builder had assumed that the space to be renovated would be vacated to work in, but the hospital couldn't do that. The builder threatened to stop work, so the board caved in and gave him an increase. The architect and the contractor fought constantly over interpretation of the drawings and specifications. The trustees, distracted by questions of finance and marketing, did not always make timely decisions. The contractor cut every possible corner to hold down costs, and the architect overruled him again and again.

Just as the building was nearly finished, the board was shocked to receive a huge change-order request from the contractor alleging inaccurate specifications, changed conditions, and decision delays by the owner. The hospital refused to pay. The builder shut the job down and placed mechanic's liens on the property.

This was where the project now stood. The members of the board—successful local businesspeople, educators, and public servants—were angry and embarrassed; the architect was bitter; the original contractor was full of I-told-you-so's for anyone who'd listen. The chairman of the board was still baffled.• • •

This story is exaggerated, of course, but parts of it are familiar to anyone who has been involved in a construction project. Building headaches are a fact of business life. Companies move. Businesses modernize old quarters. Growing organizations need more space. Companies incur some of their largest and longest term debts to finance these investments, while occupancy delays and construction quarrels can rank among the most debilitating problems a company can face. It is often impossible to predict exactly what a project will cost and how long it will take to complete, and it is always difficult to coordinate a dozen professionals—architects, engineers, contractors, bankers, lawyers, consultants, many with their own hidden agendas—and scores of subcontractors, suppliers, and workers.

All in all, the risks involved in a construction project are as great as any a company normally faces, and these risks are very different from the kind companies are used to. Yet many corporate officers and directors who consistently analyze and manage every other controllable risk fail to use all the tools available to control construction risk.

One reason CEOs and directors overlook or underestimate construction risk—and delegate it to subordinates to handle—is that construction is old technology. Buildings have been built before—what's so different about this one? The CFO is the watch-dog for other expenses—why can't she watch these dollars too? The company has a department that does its purchasing—why can't it purchase a building? The facilities manager shares a vocabulary with the contractor—why not let him oversee the process? It seems foolish not to delegate a procedure that has been repeated a million times since the pyramids were finished.

But it is the exceptional CFO who can get beyond the first few summary numbers to understand what services a prospective contractor is really proposing; it is the unusual purchasing agent who can oversee completion of a product containing tens of thousands of parts delivered over a period of up to several years; and facilities managers seldom have the expertise to defend their employers against contractors' claims. Finally, most companies do not go through the building process frequently. Construction skills are simply not part of a normal manager's repertoire.

Construction is a confusing process governed by complicated contracts and involving complex relationships in several tiers. The customer is really buying a service, not a product. At one relationship level, the contractor performs an essential service by directing and coordinating the work of dozens or hundreds of subcontractors, suppliers, craftspeople, and laborers. At the next level, someone—sometimes the contractor or the architect—must also coordinate the builder's services with those of the architects, engineers, and consultants. Finally, someone must take control of the entire process and coordinate the coordinators. At this level, the CEO and the board of directors will either manage the project and its risks or let the risks manage them. There is no substitute for responsibility at the top.

There are seven steps in the analysis and management of construction risk:

1. Understanding the types and phases of risk.

2. Assessing the risks of a particular construction project.

3. Matching risks with in-house capabilities and building a construction team.

4. Defining a building strategy.

5. Picking the right kind of contract.

6. Choosing the builder.

7. Monitoring construction.

Understanding the Types and Phases of Risk

There are three kinds of construction risk, and they surface in two phases. The first kind of risk is financial—the project exceeds its budget and endangers the financial health of the company. Budget overruns are not always a matter of poor construction supervision. They are often the result of bad planning, wishful pricing, or poor coordination.

The second kind of risk has to do with time—the building is finished behind schedule. Delays can have devastating financial consequences. What damage will your retail outlet suffer if its space is ready on January 4 instead of November 15? How will your organization function if the computer room is not ready because no one was ever assigned responsibility for ensuring uninterruptible power? What is the toll on your business if your CFO has to spend 40 days in a construction arbitration case?

The third type of risk is design-related—the completed building does not meet the organization's needs. For example, a health care organization with a fixed budget might elect to build a small addition with above-average finishwork and systems, only to discover on completion that it doesn't have enough space. (Perhaps it should have built a larger but plainer facility for the same money.) Or an office developer might pick an air-conditioning system that allows individual controls for each office but turns out to be too noisy. (A better match might have been to sacrifice individual controls to gain acoustic value or perhaps to spend more money to get both.)

All three kinds of risks can be addressed in both the preconstruction phase and the construction-and-settlement phase. The preconstruction phase is often the most grueling for the owner and often the most important. The organization must now make projections about marketing, budget, space, and schedule, and make actual decisions about design, zoning requirements, financing, traffic, and other environmental concerns. The risks in this phase are small in one sense because no one is actually building anything. But the risks are large in other ways. For one thing, consultants are expensive, and, since the construction loan is not yet in place, the company has to pay them out-of-pocket with unleveraged, highly speculative money. Also, a planning mistake or a piece of budgetary wishful thinking at this moment can cause big problems later on.

At this stage, Colossal County Hospital was already in trouble on three counts. First, the trustees were focusing on their individual specialties in marketing and finance, leaving the other preconstruction responsibilities to subordinates and doctors. Second, the architect dominated the preconstruction team and led it toward a design that would make more architectural and medical history than business sense. Third, the original contractor did not anticipate the growing wish lists, and, once he saw them, he was unable to convince the trustees that his new price was indeed reasonable—in fact, inescapable. The preconstruction team was poorly selected for the real needs of the project, and no one was in a position to monitor the team in detail and with authority.

There is a great deal of uncertainty and ambiguity in the preconstruction phase because the design-cost equation is constantly changing. A lot of hands-on specialists deal poorly with this lack of definition, and a poorly managed team can degenerate into chaos if the participants are allowed to hide behind their disciplines and stonewall or ignore each other.

The design-cost picture that emerges from this phase is the foundation on which great construction-period risk will rest, yet the work done now is the most manageable of the whole. Market and financial risks are external and uncontrollable. Preconstruction risk is internal to the team and can be controlled. The key to success in this phase, as elsewhere, is picking the right team—then providing coordination and central direction. The health care space and air-conditioning noise examples could both be best addressed in the preconstruction phase. Good use of the architect's and contractor's expertise at this juncture can save lots of problems later on.

In the construction-and-settlement phase, the risk factors move from planning to supervision. The design is mostly fixed; time risk no longer depends on creating a realistic schedule but on sticking to it; budgetary risk is no longer a matter of pricing but of cost control.

Yet appearances are deceptive. Depending on the contract, cost control is now mostly or entirely the contractor's responsibility. If your contract specified liquidated damages for late delivery, then schedule is the contractor's responsibility too, although most contracts allow several cost and schedule exceptions. What's more, a construction loan is now in place, so the bank reimburses the contractor directly for construction costs—usually on a monthly basis, always after carefully checking that the work has actually been done and the materials actually delivered, and almost always after holding back 5% to 10% of the total as a kind of performance guarantee until the entire project is complete and final settlement takes place. So where is the owner's risk?

Let's go back to Colossal County Hospital, a large institution brought to its knees at this very stage of the project. First of all, poor planning in the preconstruction phase came home to roost as the project drew to a close. For instance, the trustees had put the project out to bid on the basis of incomplete construction documents (blueprints and specifications), so the contractor had a right to adjust the price as the architect added new details. Second, while the bond issue set a limit on funds, the doctors and the architect fought to spend more, and the trustees never confronted the disparity. Third, the conditions of construction (the hospital's continued use of the space being renovated) and the trustees' repeated failure to make prompt decisions cost the contractor time, and such delays are legitimate grounds for a schedule extension. Finally, the mechanic's lien allows a contractor or subcontractor with a payment dispute to tie up a project in the courts and prevent its use or sale until the dispute is settled. And these are only a few of the problems that can crop up even after price, schedule, financing, payment mechanisms, and delivery date have supposedly been established once and for all.

As complex and as great as all these risks appear—particularly in the egregious case of Colossal County Hospital—it would be a waste of effort to try to eliminate every one of them, because that simply couldn't be done. The goal is to control and manage construction risk within reasonable limits.

Assessing the Risks of a Particular Construction Project

No two projects, no two sites, and no two construction teams are ever exactly the same. In order to pick the right team members, the right group of consultants, the right architect, the right contractor, and the right kind of contract, you need to understand the risks of your particular project. The crucial consideration is project complexity.

What are the company's needs for the project? Is there a rush for occupancy? Do you have time to develop complete blueprints and specifications before you put the project out to bid, or will you have to overlap this document preparation time with the start of construction? Are the mechanical systems routine, or will the contractor need to coordinate their design as well as installation? Is the quality of construction critical, as in a hospital, or do you need only a roof and walls? What about project financing? Some lenders will not make a commitment until they have seen the contracts and all of the completed drawings.

What about the site? There is a world of difference between building on a piece of well-drained farmland and building on a downtown site with an uncertain history and unknown conditions. Hazardous waste and the remains of old foundations are just two of the invisible surprises that are entirely the owner's responsibility in most contracts.

What about the structure? A new building will have many more components than an old one will, but a rehabilitation project will mean more unknowns and greater risks.

Evaluating the risk is the first step to controlling it. The chart, "Assessing Construction Risk," lists the chief risk elements and shows how three hypothetical projects might have rated them.

Assessing Construction Risk

Matching Risks with Capabilities and Building a Construction Team

Once you've estimated the risks of your project, the next step is to assess your organization's capacities. Building the construction team involves a series of classic make-or-buy decisions: What do we need? Can we provide it in-house? Should we buy it from outside? The chart, "Assessing In-House Capability," will help give you an idea of your organization's capacity to deal with the hundreds of construction headaches that will come up during the project.

Assessing In-House Capability

Everyone knows that building a building requires a contractor and usually an architect, a couple of engineers, a lender, several consultants, and sometimes a lawyer. (Of all these professionals, there is only one you will have the freedom to choose as you please—the architect. See the box, "Choosing an Architect," for suggestions.) For the purposes of controlling risk, however, the principal players are your own board of directors, CEO, and senior staff, one or more of whom will actually oversee the entire project.

Even if you've never managed a building project, you can still help your company find a suitable architect. Here are some tips for making the right choice:

1. Name a design committee. As soon as you've established the need for a building project, set up a committee. Members will likely include the CEO, the CFO, probable users, and maintenance staff. Decide how the architect will be chosen—by consensus, majority vote, or executive decision.

2. Outline the project. The committee must start by agreeing on a project program. Clarify what you need and want in a building. Think about goals, schedule, budget, and locations. Decide what matters most—speed, cost, design—and make a preliminary assessment of risk. For all its technical expertise, the design firm is only a consultant. There is no substitute for the owner's overall direction.

3. Decide on a selection process. Expensive design competitions are appropriate for museums and multinational headquarters buildings. The usual method—much preferred by architects—is prequalification and interview.

4. Make a preliminary list of architects. Get a list of local design firms. Ask friends, business associates, and your facilities managers for names. Prestige is less important than matching the architect with the scope of the challenges. Send a "request for qualifications" (RFQ) to likely firms. This can simply be a letter describing the project and asking interested design firms to submit their credentials.

5. Shorten the list. When the RFQ responses have come in and you've reduced the list to no more than about a dozen candidates, follow up with an RFP (request for proposals) to help you decide which firms to interview. Of course, the amount of detail you can expect from design firms in response to an RFP will depend on how much information you give them and how many contenders have a shot at the job. In assessing proposals, consider the following (the first two are the most important):

Proposed project team. Will the firm's principals work on your project day-to-day? If not, who will?

Budget-and-schedule track record. Staying within the financial and time constraints is critical.

Size of firm and length of practice. Big firms have depth, but a small firm just might give you more personalized service.

Recent project history. Look for similar clients and building types, but remember that no two projects are ever exactly the same.

Location. Local firms have a decided advantage in dealing with local authorities and regulations. Distant firms can reduce their disadvantage by working with a local architect.

Special expertise. Rehabs are different from new construction; urban and suburban areas are different; historic preservation is a special skill.

Knowledge of codes. Coordination of electrical and mechanical systems with layout and furnishings is the architect's responsibility before it becomes the contractor's.

Supervisory experience. If the design firm will be supervising construction, make sure it knows how.

Fee proposal. Architects can propose a fee only if you've defined project goals and scope enough to give them a clear sense of the job.

6. Interview the short list. The interviews will be interesting and entertaining—design firms are good at this—but don't be seduced by slides, models, and a lot of talk about the design process. Ask about the firm's approach to cost estimating and cost control; experience in getting local government approvals and handling public hearings; procedures for solving design problems; relations with the special technical consultants the project will require. Otherwise, the interview should be an elaboration of the RFP response. Make a particular point of discussing the firm's experience with construction bidding and the different kinds of contracts. Finally, make sure that the key figures on the project team are at the interview, and be sure you're comfortable with the personalities you'll be working with. From time to time, your architect will probably have to read your mind in order to turn your wishes into blueprints. Ask yourself if this is the firm that can translate your personal vision into concrete detail.

7. Check references. Interviewing will give you specific questions to ask of references. Ask particularly about the cost control, schedule compliance, and problem solving. Find out which individuals worked on the project, and speak to them. Your principal question is whether the previous client would use the same architect again, and why or why not. Visit finished buildings and talk to their users.

8. Get off to a good start. Once you understand your own goals, choosing the right architect is a matter of combining thoughtful questions with common sense. When your decision is made, notify the unsuccessful candidates and give each an explanation of your choice. Then the real challenge begins—working with the chosen architect to satisfy your company's needs.

This person or persons—whom we might call the owner's representative (or even the developer)—will be at the center of a highly charged tangle of big egos, great stress, and high financial stakes. While the architect makes erudite speeches on aesthetics and design, the contractor may communicate mostly in profanities. While the banker speaks financial double-talk in hopes of reducing the lender's risk to zero, the heads of marketing and operations tear their hair out at the prospect of getting the wrong space at the wrong time. It takes a tough leader to coordinate everyone's efforts. If the CEO has the time and expertise, so much the better. If not, then he or she will have to delegate the responsibility to some unusual subordinate with the necessary breadth of knowledge and experience, or carefully assign parts of it to the architect or the contractor. But under no circumstances should coordination be delegated casually. Construction is one of the most argumentative industries on earth and the home of Murphy's Law—"If something can go wrong, it will."

Defining a Building Strategy

The charts have two important implications. First, they show how to identify and address the various individual elements of risk. Second, they define a strategy for the selection of a contractor and consultants. A concentration of high-risk components suggests you should look for the performance benefits of cooperation and try to find a contractor able to work as a team player. Predominantly low-risk components point instead to the price benefits of competition. Both kinds of contractors are readily available virtually everywhere.

The construction industry is highly fragmented and comparatively unsophisticated. Company strategies are often more intuitive than deliberate. Still, by choice or accident, construction companies lie somewhere on the spectrum between low-cost product providers at one end of the scale and highly differentiated service providers at the other. The challenge for clients is to identify the objective of each project and to pick the right fit.

Colossal County Hospital had a high-risk job and should have built a strong, cooperative team, including a contractor who would have worked closely with the board to solve problems. Instead, a board oriented too strongly toward competition made a decision solely on the basis of price and suffered the ill effects of an adversarial relationship with the builder. By contrast, the trustee who felt he'd been "soaked" on a time-and-materials contract for a warehouse did in fact waste money on cooperation. He should have had a competitive hard-money bid based on complete construction documents.

If your project is a simple, one-story building on a flat piece of vacant land, a low-cost provider is probably appropriate. The builder will not add much value beyond getting the material to the site and erecting it. If, on the other hand, your project is a complicated, fast-paced rehab, the noncraft services offered by a highly differentiated contractor may have great potential value. Your project may place special requirements on the contractor, like building one phase while the next is still being designed and priced; anticipating discovery of unknown conditions, like concealed rotting timbers; doing a workmanlike job from inadequate design documents; or working around existing occupants. Contractors who can do all this will charge more, but they will also act more like members of your team.

Another service the differentiated contractor can provide is to help you take advantage of the fragmentation of the building business by getting good competition among subcontractors. The commercial building industry is made up of thousands of subcontractors in several hundred specialized trades. These small companies tend to be entrepreneurial and fiercely independent, and their fractiousness can be a problem or an asset. Subcontracts and purchase orders can amount to 70% or 80% of the total cost of a commercial building project. Builders skilled at handling competition at the trade level may charge a higher fee for their own services and still produce the lowest total final cost.

Some contractors are also adept at forming value-adding partnerships with the subcontractors they use most often. Teams like these can gain efficiencies from shared design and production information as well as from a good understanding of each other's work styles. In this kind of cooperative setting, the game can have a sum higher than zero. Teamwork reduces friction, uncertainty, inefficiency, and duplication of effort.

Such teamwork is what Colossal County Hospital needed at every level. Of course, building teamwork requires energy and trust. As always, the question for management is whether the added value is worth the added cost. Colossal County didn't expend the energy or money to build the right team when it should have. Other owners may not need to.

Picking the Right Kind of Contract

The disparities among the levels of service outlined here have led to three main contract types. All three have been around for years, but many owners don't understand their relation to risk control. In most cases, a good evaluation of the kind and level of risk will point clearly to one of these three contracts.

The lump-sum contract is easy to understand. Each contractor bidding on the project estimates a total cost, adds a profit margin, and bids a fixed price for the job. The owner picks the lowest bid. If costs go up, the price to the owner remains the same. If costs go down—and the incentive to make them go down by cutting corners can be considerable—the extra margin goes to the contractor. This contract is truly a zero-sum game. Whatever the contractor gets is something you don't get.

With a lump-sum contract, the contractor takes all the visible risk, and the owner takes none. This seems like a good bet for high-risk projects, but just the opposite is true. First, should costs rise unexpectedly above the price that was bid and accepted, your contractor's dedication to the job may abruptly vanish. Second, with a lump-sum contract, the price may be fixed, but so is the scope of the work. Even a small change in the project can throw the whole contract out the window, and you cannot afford to renegotiate that contract once the work is under way. By avoiding risk, you also give up most of your decision making power. In other words, you pay your money and you take your chances—which is no way to build a hospital or any other highly differentiated structure. Still, the lump-sum contract is the right contract for simple jobs where price is more important than collaboration.

Most people are familiar with time-and-materials contracts—based on the cost of work plus a fee. Lawyers bill this way, and so do auto mechanics. The builder gets reimbursed for the actual costs of the work, whatever they are, plus a percentage fee or markup. So, in other words, the owner takes all the risk and the contractor none. The customer can be fairly certain that work will be properly done, because there is no incentive to cut corners. Of course, the more the contractor spends, the more the contractor makes—and we know from experience that auto mechanics and lawyers have no particular incentive to hurry.

Despite the obvious disadvantages in terms of risk, there are three fairly common situations—and one fairly uncommon one—where time-and-materials is nevertheless the right contract for the owner. The first is when quality matters more than money. The second is when time is very limited and the contractor will have to work extensive overtime. The third is when construction documents are incomplete or missing, which leaves the contractor nothing on which to base a bid. The fourth situation comes up when owners have so much construction expertise and so much time to devote to supervision that they can get exactly what they want and still hold down costs by directing the location and quality of every brick and nail.

For most situations, one of these two contracts will fit the bill. But for many large construction users, a hybrid form called guaranteed-maximum-price is more appropriate. It is often the best contract for performing the work identified as high-risk in the two charts.

Like time-and-materials, guaranteed-maximum-price is also based on the cost of work plus a fee, but risk is shared. Up to the predetermined maximum price, the contractor passes along all costs to the owner, but once that price is reached, all risk belongs to the builder.

As in a time-and-materials contract, the owner benefits when direct costs are less than expected. But when costs go up too far, contractors absorb the overrun, as they would in a lump-sum contract. Generally, this arrangement keeps the best features of both other contract types and allows the owner to have his cake and eat it too. Most often, the guaranteed maximum price will be set higher than the lump-sum price for the same project because the contractor's profit is capped.

The goal in this case is to make contractors team players without giving them carte blanche. The construction company's profit does not depend on cost cutting but rather on good performance of this service for the owner. What the customer gets is a limit on exposure and a cooperative relationship instead of an adversarial one.

The exhibit, "Cost vs. Price with the Three Contract Types," shows price in relation to actual construction cost in lump-sum, time-and-materials, and guaranteed-maximum-price contracts.

Assume that the contractor believes your project will wind up costing just about $10 million to build. These three graphs show the price to you and the profit or loss to the contractor for three different actual final cost levels. At point a in each diagram, the contractor has shaved $500,000 from the anticipated cost. At b, costs have run as expected. At c, there has been a cost overrun of $500,000. Basically, with a lump-sum, the contractor gets all the savings and takes all the risks. With time-and-materials, the owner gets the savings and takes the risks. And with guaranteed-maximum-price, the owner gets the savings, the builder takes the risk.

Lump-Sum Contract

Time-and-Materials Contract

Guaranteed-Maximum-Price Contract

These three contract types all assume the traditional owner-architect-contractor configuration. There are three less common ways to assign these roles. With a turnkey contract, the owner buys site, design, and finished building as a package. The supplier secures the construction financing and plays the role of owner and contractor (and sometimes architect) during construction. Turnkey contracts are suited to situations where the needs of the user are easily described.

A design-build contract is very like a turnkey contract in that the architect and contractor work under one contract, giving one source of responsibility. This fosters cooperation at the cost of eliminating traditional checks and balances. But in design-build, as opposed to turnkey, the owner is responsible for financing.

Construction management, in its simplest form, is merely a consulting service. Construction managers often supplement the owner's in-house construction team by giving advice and providing supervision for a fee. They take no fiduciary responsibility, and they do not guarantee price, results, or schedule. (Be aware that architects, engineers, contractors, and consultants all use the phrase "construction management" a little differently. Before you contract for construction management, make sure you know exactly what you're getting.)

Choosing the Builder

It sounds elementary at this point to say that the way a company chooses a builder should match its project-risk level and contract type. But the old practice of bidding out contracts is so well established that organizations resort to it even when it makes no sense. Each kind of project and contract should have its own selection criteria.

Lump-sum. The builder for a lump-sum contract can be chosen almost entirely by means of an open bid based on construction documents—blueprints and specifications—that clearly define the scope of the work. (Never put partial documents out to bid. In fact, if you must choose a contractor before the documents are done, lump-sum may be the wrong type of contract.) Beyond requiring bidders to satisfy some minimum level of experience, reputation, and financial strength, price is really all you care about.

One warning: Resist the temptation to take advantage of a very low bid. It may be a mistake based on misinterpreted construction documents, and the ensuing fight won't be worth it.

Time-and-materials. For a so-called cost-plus or time-and-materials contract, reputation, ability, and trust are paramount. Check references, look for the right chemistry between all parties, make sure you are comfortable with the builder. Whatever you do, don't try to make a selection on the basis of some kind of estimated bid. If the contract has no cap, the bid means nothing. It can only tempt you to choose the lowest of several meaningless numbers, and that is a good way to pick the least competent candidate.

Guaranteed-maximum-price. The process here is much like the one above. Your guide should be the contractor's experience, references, and integrity, and the chemistry between you. You are planning to pay a fee to a company for its competence in managing construction, meeting schedules, maintaining quality, providing construction services, and treating its clients honestly and fairly. Establishing that competence should be your only criterion.

Any company in the running for this type of contract will be able to give you the names of previous customers who can tell you just how well it performed in the past. Ask about the accuracy of the cost estimates and the extent of the savings returned to the owner (or the size of the overrun absorbed by the contractor). Ask how many serious fights there were and whether they were settled satisfactorily. Find out if the space was delivered on time. Ask for references from former subcontractors as well, and find out what they thought of the company they worked for. You are buying a value-added service. Make sure you will get what you're paying for.

Monitoring Construction

Everybody likes to watch excavating equipment and play sidewalk superintendent when the big steel flies. Monitoring the team and the contract is much less fun—and much more important. Once again, the scope and method of supervision depends on the kind of contract.

On a lump-sum contract, the developer or the owner's representative must monitor both materials and workmanship to make sure the contractor does not pad his or her own profit by delivering less than what was contracted for. This level of attention calls for a construction supervisor who understands specifications, details, workmanship, and materials gradation and handling.

On a time-and-materials contract, the construction supervisor's job is to see that the contractor doesn't waste the owner's money. The builder will not likely cut corners, but cost control probably won't be a top priority either. This kind of contract needs a monitor who understands labor productivity, effective use of raw materials, and cost accounting.

In theory, the structure of a guaranteed-maximum-price contract reduces the degree of supervision the owner will need. The contractor assumes the risk of a cost overrun and earns a predetermined fee to make sure that the work and the materials are right. Still, a prudent owner will keep an eye on workmanship and accounting. The skills of an experienced construction supervisor must still be available, but the need is less urgent.

Clearly, the person who acts as construction supervisor needs experience and expertise. Few CEOs—and few members of the board—would qualify. If the project coordinator is not a construction expert, it may sometimes be worthwhile to hire a construction consultant. Often the architect is used for construction supervision, and sometimes this works very well. But architects are trained to design, and their capacity and willingness to check on workmanship, monitor materials, and oversee accounting is at best uneven.

Then, too, as projects grow more complex, the architect has a progressively greater need to work with, not against, the contractor. There will always be issues of interpretation, aesthetics, even cost, for them to consider together. And in a project with many unknown risks—a building with marine foundations, say, or the renovation of a historic structure—the contractor's experience and judgment are crucial assets for the architect. An owner's insistence on police duty can impair an architect's ability to work with the builder.

Colossal County Hospital survived its ordeal—the city intervened with an emergency loan and a supplemental bond issue—and learned from the experience. For its next addition, the board built a team from the beginning and stayed abreast of the process. The new chairman of the board, head of a local management consulting firm, took on the role of in-house developer. She led the team through a preconstruction analysis of complexity and risk that then drove the choice of contract, builder, financing, and schedule. The chosen contractor had a reputation for accurate pricing and cooperative problem solving. The project came in on time and even slightly under budget.

The manufacturing trustee learned his lesson too. For his new distribution center, he hired an architect who could provide him with dependable, detailed drawings; he put the project out to bid only when all of the specifications and blueprints were complete; and he chose the low bidder from a field of 12 pre-qualified builders. The space cost him 50% less than with the earlier time-and-materials contract.

Construction is a major obligation for many growing companies. The initial estimates of cost, time, and trouble are bound to change dramatically as work progresses. The construction team itself may be volatile and problematic. But the directors and top management of your company can identify, analyze, and rationally control these risks.

A version of this article appeared in the March–April 1989 issue of Harvard Business Review.