Construction: Different Types of Contracts
It is important to clearly define the organizational structure of a real estate transaction before it begins. Indeed, there are several types of contracts available, and each has its own advantages and disadvantages. The purpose of this article is to draw the reader’s attention to the distribution of roles and responsibilities among the parties depending on the chosen model, and to highlight the various opportunities and risks so that the reader can make an informed decision.
To do this, we will simplify the real estate project by considering it to consist of two main phases: the design phase, during which the architect and specialized consultants define the project in collaboration with the project owner and establish its specifications (plans and descriptions); and the construction phase, the period during which the structure is physically built (construction site).
We will compare three organizational structures, namely:
The Architect’s Contract
The General Contractor’s Contract
The Turnkey Contract
Before going into further detail, it is worth reviewing the specific characteristics of these models.
Architect's Scope of Work
The architect’s contract is the type of agreement that can be described as the “traditional model” in Switzerland. In this model, the architect and specialized contractors are hired directly by the client and are responsible for the design and construction phases. For the construction phase, the various trades also have direct contracts with the client but operate under the direction of the architect, who oversees the construction work.
General Contractor
The general contractor agreement is a hybrid model. Under this structure, the project owner enters into direct contracts with the architect and specialized consultants for the design phase. Subsequently, the construction phase is entrusted to a general contractor through a general contractor agreement. The general contractor is responsible for completing the project and, if necessary, enters into its own contracts with subcontractors. During the construction phase, the architect’s and specialized consultants’ services are limited to verifying that the work is being carried out in accordance with their specifications.
Turnkey Contractor
In the turnkey model, a single contract is signed by the project owner because, in this case, the turnkey contractor is also responsible for the entire design of the project. The architect and specialized consultants are then directly commissioned by the general contractor.
The Main Differences
One of the key differences between an architect’s engagement and general contractor or turnkey contractor agreements is that the architect’s scope of services is significantly reduced under a general contractor agreement, as the entire construction phase is excluded.
It is important to note that, in terms of liability, the architect and specialized contractors are only bound by a duty of care. This means that if the budget and/or construction timeline are exceeded, and if they can prove that they have not breached their duties of loyalty and disclosure, they cannot be held liable. Conversely, in a construction contract, the contractor is bound by contractual obligations. This means that if the price (maximum or fixed) and the deadline are clearly stated in the contract, it will be possible to hold the contractor liable for any cost or time overruns, which significantly reduces these risks.
The traditional model (architect’s contract) involves more administrative work for the project owner due to the significant number of contracts that must be drawn up and managed. The fact that there are a large number of contracts also means that, in the event of a defect during construction or the warranty period, there may be several parties responsible, and it may not be immediately clear who is liable. In the case of a general contractor agreement, the general contractor is solely responsible.
As for the price, the difference stems from the transfer of risks from the project owner—in the traditional model—to the contractor under a construction contract. These risks are factored into the contractor’s costs and can be considered an additional expense. However, experience shows that this is offset by the fact that the contractor has greater leverage when negotiating contracts with subcontractors and, due to the recurring nature of future projects it can offer, benefits from economies of scale.
On the other hand, if the project specifications change during the construction phase, the architect’s contract offers a bit more flexibility, even though it is, of course, not advisable to make changes at this stage of the project. In fact, with a construction contract, care must be taken to ensure that the specifications are very precise during the bidding phase; otherwise, the general contractor will take advantage of the situation to impose cost increases. Furthermore, whenever a project change occurs, the contractor will submit a new bid that will be much more difficult to negotiate at that stage of the project.
Finally, in the traditional model, architects tend to emphasize details and finishes, which are said to be of higher quality.
Which model should you choose?
It is clear that the larger the project, the more attractive the general contractor agreement becomes. Conversely, for smaller-scale projects, it will be difficult to attract well-known general contractors (the contractor’s bankruptcy would be a major problem), and in such cases it is better to opt for an architect’s contract.
From our perspective, no single model should be favored over another; it all depends on the client’s profile, how your project is defined prior to the construction phase, and the scope of the construction.
Choosing a construction model is a complex decision, and this article only provides a general overview. Furthermore, each type of contract must be properly structured and drafted to avoid any surprises. For personalized advice, please do not hesitate to contact us; Jouan – de Rham SA will be happy to assist you with these matters.
Léonard de Rham
Director
Rue d’Italie 11 – 1204 Geneva
022 340 75 92
Construction: Different Types of Contracts