Construction Contracts Risks

The risks associated with construction activity vary depending on the type of contracts used. Also, change order requests present another set of issues to which careful attention should be paid.

Below is a sample of risk areas in two most common contract categories and in change orders:

Lump Sum Contracts

• - Specified quality materials not used
• - Specified construction method not used
• - Specified services not provided
• - Unapproved credit alternates implemented
• - Contract quantities not installed
• - Allowances not properly adjusted
• - Required bonds not obtained
• - Required insurance coverage not obtained
• - Owner provided items not credited

Cost-Plus or Time and Material Contracts

• - Excess hours charged by reimbursable personnel
• - Hours charged by non-reimbursable personnel
• - Billing rates exceeding actual pay rates
• - Labor burden percentage factors exceeding actual cost
• - Charges for materials may be excessive
• - Charges for subcontracted work may be excessive
• - Third party equipment rental charges may be excessive

Change Orders

• - Change Orders not priced in accordance with Contract
• - Labor rates exceeding actual pay rates
• - Labor burden factor exceeding actual cost
• - Material unit prices used exceeding actual cost
• - Quantity estimates not accurate
• - Labor hours arbitrarily inflated

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