Negotiated Fee Contracts Have Their Place

Most Owners are reluctant to issue a major construction contract without knowing the bottom line cost. Getting to that point, of course, requires lead time for design evolution and documentation so that contractors can bid. There are times, however, when the advantages of getting the Contractor on board as early as possible warrant the acceptance of some additional risk. The question then is which project delivery method should be used, Fast-Track, Design-Build, or Negotiated Fee.

Negotiated Fee contracts offer many advantages, including early engagement of the Contractor while avoiding the contractual and schedule intricacies of other project acceleration methods. Certain project conditions strongly favor this option. Examples would be a hyper-critical schedule or the need for contractor participation in pre-construction activities such as value engineering, project estimating, and constructability reviews in a project where the Owner wants to retain as much control as possible.

In Negotiated Fee projects the selection of the Contractor is based upon a review of qualifications, appropriateness for the work, availability, and the negotiated fee points. RFP’s for a Negotiated Fee contract should include all of these and other routine due diligence questions, and your follow-up should be just as complete. Negotiated Fee contracts may or may not include a Guaranteed Maximum Price, depending on the state of design documentation and allowable time (use AIA Document A-411 for projects with a GMP, and AIA A-414 for those without a GMP).

The heart of the matter (assuming all of the contractors you are considering are qualified and appropriate) are the fees that you negotiate. These are provided by the Contractor in its RFP response and may be accepted as-is or further negotiated. Typically these include overhead and profit rates expressed as a percentage, a set amount per day for General Conditions, and the Change Order mark-up rate. Also consider locking in hourly labor rates and unit costs for typical items. Remember that General Conditions should be a set fee for a defined time period (day or week), not a percentage of the project cost. Finally, make open book bidding and Owner review and/or participation in the sub-trades buy-out process a firm requirement.

While some Owners may feel there is risk in this methodology the fact is that the Contractor is assuming more risk by setting these rates and agreeing to opening the books during trade bidding and buy-out, which protects the Owner against any attempts to embed additional costs. The Contractor also shares in the responsibility to deliver at the expected overall cost since they participate in value engineering and provide cost estimating services during the design process. Significantly, this model eliminates protracted bidding exercises between design completion and start of construction, thereby, saving time and money without compromising value or quality. The advantages of this delivery method go primarily to the Owner in increased speed and flexibility.