Day 12: Contract Types, Risk Allocation, and the CM's Authority
9% of the exam - about 2.5 hours - 14 practice questions
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Reading
Every contract type is fundamentally an answer to one question: who absorbs the difference between estimated and actual cost?
Lump sum: the contractor prices the risk
Lump sum, also called stipulated sum or fixed price, sets one price for a defined scope. The contractor carries cost risk. If the work costs more than estimated, the contractor absorbs it; if less, the contractor keeps it. This requires a complete, well-defined scope. Using lump sum on an ill-defined scope does not transfer risk so much as guarantee change orders and disputes.
Unit price: quantity risk shifts to the owner
Unit price sets rates per measured unit (dollars per cubic yard of excavation, per linear foot of pipe), with final payment based on actual measured quantities. The owner carries quantity risk; the contractor carries productivity and unit cost risk. This suits work where quantities genuinely cannot be known in advance, such as earthwork or rock removal. Watch for unbalanced bidding, where a contractor inflates unit prices on items it expects to overrun and deflates those it expects to underrun. The CM's bid review should test unit prices against the independent estimate item by item, not just compare bottom lines.
Cost plus fee and the GMP
Cost plus fee reimburses the contractor's actual allowable costs plus a fee. The owner carries cost risk. The fee may be a fixed amount, which gives the contractor no incentive to inflate cost, or a percentage of cost, which perversely rewards higher cost and is generally disfavored. Federal acquisition rules prohibit the cost-plus-a-percentage-of-cost system outright (FAR 16.102(c)). Cost plus suits emergency work or scopes that must start before definition is complete.
Guaranteed Maximum Price is cost plus with a ceiling. The contractor is reimbursed actual cost plus fee, but absorbs anything above the GMP absent approved changes. Savings below the GMP may be returned to the owner, shared, or retained, depending on the shared savings clause. The GMP is the workhorse of CM at Risk delivery. The critical exam point is that a GMP is only as good as the scope and assumptions documented with it. A GMP established at 50 percent design carries a long list of qualifications and clarifications, and every one of those is a potential change order later. The CM's duty is to reconcile that list against the documents and flag the gaps to the owner before the GMP is accepted.
Pricing type is a risk-allocation choice, not just a payment mechanic. The further right, the more the owner is exposed to actual cost.
Incentives, layered on top
Incentive arrangements layer on top: shared savings, early completion bonuses, liquidated damages for lateness, or a target cost with a pain-gain share. The exam tests whether you understand that an incentive only works if the measured outcome is within the contractor's control and is measured objectively.
The CM's authority: advisor versus at-risk
This is where CM as Advisor and CM at Risk diverge sharply, and the exam builds scenarios around the difference.
As advisor or agent, the CM administers the contract on the owner's behalf but does not hold it. The CM recommends; the owner decides. The CM cannot unilaterally approve a change order that alters contract price or time, cannot direct the contractor's means and methods, and cannot waive contract requirements. A CM who issues a direction that effectively changes the work without owner authorization has created a constructive change and exposed the owner to cost.
As CM at Risk, the CM holds the trade contracts and is the constructor, with corresponding authority and corresponding liability.
The most common trap on the exam: the scenario has a CM as advisor doing something only the owner or a contract-holder could do. Read for the delivery method first, then evaluate the action.
Constructive change: how authority gets exceeded without anyone noticing
A constructive change occurs when the owner or its representative, without issuing a formal change order, does something that effectively alters the work. Examples include over-inspection beyond contract standards, rejecting conforming work, directing a particular means or method not required by contract, furnishing defective design, or failing to act within a required time. The contractor may then claim entitlement as though a change had been issued. The CM prevents this by keeping directions within the contract and routing anything that alters scope, cost, or time through the formal change process.
Why this matters for the exam
Contract administration questions usually test the same two things in different clothing: can you correctly place a pricing arrangement on the risk spectrum, and can you tell what a CM as advisor is and is not authorized to do without the owner. A scenario that hands the CM as advisor a decision reserved to the owner is testing whether you will hesitate.
Practice Questions
1. Under a lump sum contract, cost overrun risk is carried by:
The owner
The contractor
The designer
Shared equally
Answer: b. The contractor commits to a fixed price, so any cost above it comes out of its margin. The owner's exposure is limited to changes in scope, which is why lump sum suits a design complete enough to price.
2. Under a unit price contract, quantity risk is carried by:
The owner
The surety
The CM
The contractor
Answer: a. The contractor carries productivity and unit cost risk; the owner pays for actual measured quantities.
3. A cost plus percentage fee arrangement is generally disfavored because:
It is illegal on every project, public or private
It eliminates change orders
It caps the owner's exposure at the estimated cost of the work
It rewards the contractor for higher cost
Answer: d. A percentage fee grows as cost grows. The contractor's incentive runs directly against the owner's, which is why the arrangement is disfavored everywhere and prohibited on federal contracts (FAR 16.102(c)).
4. A GMP established at 50 percent design should prompt the CM to:
Increase retainage on each payment application until the qualifications list has been resolved
Convert the contract to a lump sum price at once so that the contractor absorbs every qualification and clarification on the list
Reconcile the contractor's qualifications and assumptions against the documents and flag gaps to the owner
Accept it as final once the contractor certifies that its qualifications are reasonable and complete
Answer: c. Every unreconciled assumption is a future change order.
5. A CM as advisor directs the contractor to use a specific means and method not required by the contract. This likely constitutes:
A quality control action taken to verify that conforming work is being built correctly
Value engineering
A constructive change exposing the owner to cost
Good practice
Answer: c. Means and methods belong to the contractor. A CM who directs them is adding a requirement the contract did not contain, and the contractor can price the difference as a change.
6. Unbalanced bidding in a unit price contract is best detected by:
Reviewing the schedule
Comparing bottom-line totals only
Checking bonding capacity
Comparing individual unit prices against the independent estimate item by item
Answer: d. Unbalanced bids look normal in total. The distortion lives in the individual unit prices, loaded high on quantities the bidder expects to overrun. Only a line-by-line comparison against the independent estimate finds it.
7. Under CM as Advisor, approval of a change order altering contract price requires:
The CM's signature alone
The architect's approval alone
The owner's authorization
No approval
Answer: c. The CM as Advisor has no authority to obligate the owner's money. The CM recommends; the owner authorizes. Signing alone would be acting outside the agency relationship.
8. Over-inspection beyond the contract's specified standard may result in:
Improved quality at no cost
Automatic time extension
Reduced retainage
A constructive change claim
Answer: d. Requiring more than the specification is requiring work the contractor did not price. That is a change in the contract's requirements, and the contractor can claim it as one.
9. A shared savings clause on a GMP contract allocates underruns below the ceiling. This incentive works as intended only when:
The measured outcome is entirely outside the contractor's control, so the reward cannot be earned by effort
The measured outcome is within the contractor's control and is measured objectively
The owner sets the GMP after construction is complete
No fee is paid at all
Answer: b. An incentive only changes behavior when the party being incentivized can actually influence the outcome and the outcome is measured in a way both sides trust.
10. Using a lump sum contract on a scope that is only 30 percent designed and poorly defined tends to:
Automatically convert to a GMP
Eliminate the need for an independent estimate
Successfully transfer all risk to the contractor with no side effects
Guarantee change orders and disputes rather than genuinely transfer risk
Answer: d. A fixed price on an undefined scope does not make the risk disappear. It just guarantees that every gap in the scope surfaces later as a change order dispute instead.
11. Where does a straight cost-plus-fee (no GMP) arrangement sit on the risk spectrum?
Furthest toward the owner carrying risk, since there is no ceiling on reimbursed cost
Exactly identical to lump sum, since in both cases the contractor is paid a fixed fee for the whole scope
It cannot be placed on the spectrum
Furthest toward the contractor carrying risk
Answer: a. With no ceiling, the owner reimburses whatever the actual cost turns out to be. That is the furthest point toward owner-carried cost risk on the spectrum.
12. A CM as advisor waives a submittal requirement on their own authority to keep the schedule moving. This is best characterized as:
An action outside the CM as advisor's authority, since waiving a contract requirement is reserved to the owner absent delegation
Required whenever a delay is imminent, because a CM as advisor must protect the schedule even where that means setting aside a contract requirement
Only a problem if the contractor objects
Standard practice requiring no owner involvement
Answer: a. Waiving a contract requirement changes what the contract requires. As advisor, the CM recommends that kind of relief; only the owner (or an explicitly delegated authority) can actually grant it.
13. Which of the following is NOT one of the classic constructive change triggers described in this lesson?
Furnishing defective design
Issuing a properly authorized, written change order
Rejecting conforming work
Directing a means or method not required by contract
Answer: b. A properly authorized, written change order is the formal process working as intended. Constructive change is specifically what happens when the work is effectively altered without going through that process.
14. A CM at Risk who directs a subcontractor's means and methods on a trade contract the CM itself holds is:
Acting within the authority that comes with holding the contract, unlike a CM as advisor in the same situation
Automatically committing a constructive change, since any direction given to a subcontractor changes the work
Required to obtain owner approval for every direction regardless of contract role
Acting outside any authority, since a CM at Risk holds only the owner's agreement and never holds any trade contracts
Answer: a. CM at Risk holds the trade contracts directly, which comes with real contractual authority over that work. The same direction from a CM as advisor, who holds no contract with the sub, would be a different and much riskier act.
Micro-Assignment
Take a real contract you have worked under, or construct one. In one page, identify the pricing type, state exactly which party carries cost risk, quantity risk, and schedule risk, and list three provisions that shift risk away from the default position for that type. Then identify the single provision you would most want changed if you represented the owner, and why.
Glossary
Lump Sum
One price for a defined scope; contractor carries cost risk.
Unit Price
Rates per measured unit; owner carries quantity risk.
GMP
Cost plus fee with a ceiling; contractor absorbs overrun above the ceiling absent approved changes.
Shared Savings
Clause allocating underruns below the GMP between owner and contractor.
Constructive Change
An effective change to the work arising without a formal change order.
Unbalanced Bid
Unit prices distorted across line items to exploit expected quantity variances.
CM as Advisor
CM role that administers the contract on the owner's behalf without holding it; recommends rather than decides.
CM at Risk
CM role that holds the trade contracts directly, with corresponding authority and liability.