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Running head: CONSTRUCTION DOCUMENTS 1

[Title Here, up to 12 Words, on One to Two Lines]

Austin Petersen

Bowling green state university


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CONSTRUCTION CONTRACTS IN THE REAL WORLD

My research is on construction documents. Specifically, I am looking into construction

contracts and how they work. I have done the majority of my research through the school library

where I could find scholarly sources and research that has been peer- reviewed. Through my

research I learned about different techniques to look at the contracts, what makes up a contract,

and the different types of contracts in the industry. Contracts have been around in the

construction world ever since people started to build for others and not just themselves. The

contracts are needed to make certain that the builders get paid, they finish on an appropriate time,

and they are held accountable for the quality of work that is done. These contracts are not always

written down in order to prove what was said, sometimes verbal contracts will worked and have

worked. Construction contracts are a good way to help the building of a project go as smoothly

and efficiently as possible by holding the people involved accountable for what was agreed upon

prior to the building process. Throughout this essay you will find information gathered from

second hand sources found through the library and first-hand sources that will be interviewed

and asked a series of questions related to how they personally use construction contracts in

todays world.

Contracts make the project run more efficiently and smoothly by creating a clear

agreement between the different parties. According to Rodriguez (2018) and Fortney (n.d.), there

are a lot about the different types of construction contracts in which are used for different types

of projects or situations. There are four main written contracts that are the documents that most

project managers go to when they want to make a written agreement between the builder and the

buyer. The first is a lump sum or fixed price contract. These contracts involve the total fixed

price for all construction activities. They are primarily used when a clear scope and a defined
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schedule has been mutually agreed upon. The second type is cost plus contracts. These contracts

are more specific to each payment or expense made when the project occurs. They are used when

the scope is not clear, and it is the owner’s responsibility to establish some limits on how much

the contractor will be billing. The benefit of this contract is that the owner is not paying for any

more than he/she has to, but in return they have to do a lot more supervising due to the difficulty

of tracking the expenses and such. The third type of contract is a time and material contract

which are used when the scope has not been defined. The contract will include a hourly or daily

rate including additional expenses for change orders. The forth contract is a unit pricing contract

which is used for the ease of adjustability during change orders. The contract set a price on the

units such as each piece of wood or cinder block. If the scope changes It becomes very easy for

the owner and builder to reach an agreement for the new price.

Fortney (n.d.) added on to just the different types but a little more about verbal contracts.

The verbal contracts are enforced, but just like you would think, a verbal contract doesn’t present

a clear record of what was agreed upon. When there is a problem the verbal contract is subject to

the party’s recollection of the terms which can be manipulated. Both the sources portray the

same information about the different types of contracts

Knowing how to negotiate a contract and being prepared will save you headaches and in

the future. Negotiation are aloud due to the fact of most construction being in the private sector.

Some job dealing with the government cannot be negotiable, but rather come down to the

bidding process. The bidding process happens when the buyer wants something down. Let’s use

a road for example, the buyer will say what they want, and it will go to a public bidding in which

many contractors will compete with each other on who can perform the job better. The factors
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that go into who can perform better would include the quality of work which would come from

reputation, who comes out to be the cheapest option, and who can finish the job the fastest.

Rodriguez, J & Surahyo, A both had a lot of information on negotiation. They both talked

about the law behind the negotiation and the main no-no for the contracts is if the job calls for

competitively placed bids, negotiation isn’t permitted. However, if the public sector does not

require a competitive bid than it is open range for the contractors to negotiate with the buyer.

Both authors also gave some insight on how to properly use negotiation skills to get the best deal

possible. This includes setting your goals as to what you want to get out of the contract prior to

the negotiation. This also includes never backing down on past earned rights. By this I am

talking about once you get to a point in the conversation where you are getting what you want

and they try to take back what they have already offered you by saying for example “ If you

bring the concrete slabs back down to one hundred dollars per ton, I while give you an extra

week to finish the project.”. In this case the one negotiator wants to take back what they already

agreed on by giving the contractor something else he wants. This usually will never work in the

contractor’s perspective even though they may be tricked into thinking as such. Overall being

able to negotiate properly in the construction world can be the difference on making millions on

a job or coming out in a loss.

Another big portion of the construction contract world is knowing if it’s a good or bad

time to take a job. Calculating risks in this industry can make all the difference on the success

and the company. Zaghloul, R., & Hartman, F talk about the risk involved in making contracts.

Some of that risk being liability of if something goes wrong, who will that fall upon. To calculate

this problem contractors may use risk allocation through disclaimer clauses to help guide them in
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the right direction as far as what jobs are worth taking and which ones aren’t. Below is a

document to explain what the risk allocation process looks like.

Figure 1: Zaghloul, R., & Hartman, F.

With risk comes trust and trust is sometimes hard to find in the industry. The reason for

contracts in the first place is because “in the absence of trust in business relationships, there is a

significant need for good and powerful control system to manage and administrate the

contracting process.” Contracts are what takes a lot of the risk out of the deals.

Another part of calculating risk is using graph and data to find the best decisions. I

gathered an example histogram form the article to show what these graphs look like in the real

world. Below is a histogram of magnitude of the real risk in relation to the size of the

contract/cost
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Figure 2: Federal Reserve Bank of Chicago

The article splits trust up into three different categories blue, yellow, and red. Blue is

competence or trusting them to do the job. Yellow is integrity or if they can consistently take care

of the interests of the contractor. Red is intuitive or rather how the person feels about the other. If

the relationship doesn’t feel right, there will be no trust. This goes hand in hand with the

construction documents which are pretty much a baseline as to what has to in the contracts. This

take a lot of the trust out of the equation leaving less to chance on whether the general

contractors will do what they agreed upon. The article “Financial Risk estimation in Construction

Contracts” says similar thoughts on the subject. The article talks about the relationship between

the size of the contract to the degree of risk. To sum this up, there will always be risk in

contracting out work, but when the right provisions are put in place risk can be put to a

minimum.

In conclusion of my second-hand research, contracts in the world of construction is what

makes the industry a success and plays a part into what makes the jobs run smoothly without

lawsuits or problems. Contracts take the trust between the owners and the contractors carrying

out the work. Calculating the risk involved with a contract can make the world of a difference

and being able to negotiate said contracts can put more money in the pockets of either side. All in
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all, I learned a lot about what makes up a construction type contract and what goes into making

everything run smoothly.

Now after getting a baseline knowledge of what the contracts were and what they were

used for, I went to the real world and found to employees of the construction industry and asked

them what they thought. Getting to listen to what these two people had to say will be very

beneficial as they give a different perspective on the topic than what I can tell you from just my

online research.

Methods:

I interviewed two employees from a company called RACK Transport. They haul liquid

AC around Ohio to help pave and maintain the roads. I was trying to get an opinion of a guy and

girl in order to diversify my report as much as I could. The first interviewee was Holly Steffens

who is the CEO of RACK. The second interviewee being Sean Petersen who president at Ronyak

paving Co. and works on the side at RACK. I began my interview with questions that related to

helping me understanding their positions. They were both asked how often they use or create

contracts for new jobs they are working. I asked them how effective contracts are in aiding the

success of a job. Once I got those answers it raised for questions in my head like how do you

specifically go about negotiating a contract for a new job. How do you know what is a good deal

and what is a bad? Both Holly and Sean were asked the same question together.

I met with the both of them during their lunch break last week to pick their brains a little

bit on what they knew about construction documents, specifically contracts. I knew they would

have had some experience with contracts because Sean was a project manager for many years at

a paving company and then became the president of that same company. Then on top of that,
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both Holly and Sean own Rack together in which they find and bid their own jobs. This is how I

knew I found the right people to talk to.

I used an activity triangle to help myself analyze the activity system. In my case the

activity system would be Constructions documents. The triangle can show how a certain system,

in this case being the construction documents, is organized. The reasons why there is a need for

said activity, and the rules and regulations and the people who are affected by the activity. The

triangle connects each of these subjects with arrows to help show the relationship between all of

them. (see figure 1 below)

Figure 3: Activity system triangle format

Results and Answers:

After analyzing a construction contract, I found a lot of answers that I didn’t

know what to do with. Once I was able to organize my findings in the triangle, things started to

make more sense. The sample contract I found was a construction contract for Montrose County

in Colorado. The example given has all the dates removed as well as the people involved for the

most part. They are left blank in order to keep the legitimacy and ease of replication of the

contract. The Contract is meant to be a sample to learn off of which I would assume is why they

took the names and dates out. Below I will fill in the activity triangle with my own findings.
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TOOLS: Construction documents, computer software such as word & Excel, verbal

communication

SUBJECT: The owner, the contractor, the subcontractor

RULES: If you break the contract lawsuits may occur.

COMMUNITY: the community using the structure that is being built, the construction

company, the government

DIVISION OF LABOR: government to enforce, contractors to labor/build, buyers to

provide the capital

OBJECT:

-Objective: To figure out how the contractors well get paid and what limitations

are put in place

-Outcome: to make sure both sides keep their word


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Below is the first page of the sample contract that I found.

Figure 4: Montrose county contract

The formatting of a construction contract will usually be in a formal format throughout

the entire document. The contract is organized by articles which will go into detail about the
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payments, contract documents, royalties and payments, etc. The start and the end of the contract

will leave space for the contractor to date and sign which will put the contract into effect.

Now back to the interview in which I used my previous knowledge that I gained form the

sample contract above to ask the two interviewees questions. From the question I asked Sean and

Holly I got some new information that I didn’t find through my research in the literacy review.

Their answers I got gave me a closer look at a specific type of job which is a trucking company.

We talked about the types of contracts that they use. I could talk with an educated tongue

because I found through my prior research all the different types of contract and which ones

should be used for a certain job. Sean said that he mainly uses unit pricing contracts because they

get paid by the tonnage of material the haul. This led into my next question about negotiation.

Holly said that she rarely will use a lump sum type contract in which she can negotiate the prices

and dates. She usually only uses unit pricing type contracts which are public bid jobs that can’t

be negotiated.

I then went into the topic of breaking the contract. I asked what happens and how often

are the contract broken. Sean said he rarely has to deal with somebody breaking a contract and he

hasn’t broken one himself. He elaborated on the fact that sometimes things happen, and the

contractor can have setbacks. In the case of a contractor not finishing the job on the said date, the

owner will hire another contractor to finish the job and then sue the first contractor for the

difference in pay that was lost with the extra time.

When I did my research online I was mostly looking at the bigger picture of construction

as a whole. It was good to get a look at a more specific part of the industry. Within our

conversation a lot of what was said related back to my research such as the types of contracts that

are widely used and what can be negotiated and what cant. My research included little about
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what actually happens if the contract is broken so being able to talk to somebody that has seen

broken contracts play out first hand was beneficial to my findings.

Constructions contracts are all tied together in many ways. Government is tied into

everything buy being the ones bidding the contracts and enforcing them at the same time. The

citizens of the community are involved because they are the ones benefiting from a timely and

efficient job. They are also paying for the job through tax dollars. The owners and the contractors

are tied together by both wanting the same outcome and having the same needs. Everyone is all

in the same boat in the sense that they all want to get things done is the safest and fastest manner

possible.

In conclusion to the first and second-hand research I think it is safe to say that contracts

at least in the construction world do a lot more good than they do harm. Sure, you may find an

outlier case were the contractor may get manipulated into a bad deal, but for the general

populace, contracts make for a reassurance. Reassurance that everybody will act in a safe manner

and will not cut any corners. The contract will make sure that the job in done on time and

workers are getting paid. In short contracts help to assure that everyone involved with the job

comes out in the end happy.


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Reference Page

Mind Bursts. (n.d.). Retrieved April 28, 2019, from https://mindbursts.com/tag/activity-

system/

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&ua

ct=8&ved=2ahUKEwj_xYTisObhAhVRaq0KHWT5AIgQjRx6BAgBEAU&url=https%3A%2F

%2Fmindbursts.com%2Ftag%2Factivity-

system%2F&psig=AOvVaw2bZYoKgvZadLQKRj8htkHe&ust=1556114585499173

Construction Contract[PDF]. (n.d.). County of Montrose.

https://www.montrosecounty.net/DocumentCenter/View/823/Sample-Construction-

Contract

Rodriguez, J. (2018, October 22). Common Construction Contracts for Your Product or Project.

Retrieved March 28, 2019, from https://www.thebalancesmb.com/common-types-of-

construction-contracts-844483

Rodriguez, J. (2019, March 10). Follow These Rules to Become a Great Contract Negotiator.

Retrieved April 3, 2019, from https://www.thebalancesmb.com/how-to-become-a-

successful-contract-negotiator-844810

Surahyo, A. (2018). Understanding construction contracts: Canadian and international

conventions. Cham: Springer.


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Fortney, M. L. (n.d.). Construction contract basics. Retrieved March 28, 2019, from

http://www.fortneylawgroup.com/faqs/Components-of-a-Written-Negotiated-

Construction-Contract.html

Valentinas, P. (2010). COMPLEX EVALUATION OF CONTRACTS FOR

CONSTRUCTION. Retrieved March 28, 2019, from http://tinyurl.com/yxfmxlk3

Zaghloul, R., & Hartman, F. (2003). Construction contracts: The cost of

mistrust. International Journal of Project Management, 21(6), 419-424.

doi:10.1016/S0263-7863(02)00082-0
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[Title Here, up to 12 Words, on One to Two Lines]


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