What Is a Construction Management Contract?

A Construction Management Contract gives project owners more control and transparency than traditional contracts. Instead of handing full authority to a general contractor, the owner works directly with a Construction Manager, who oversees the project, coordinates trades, and ensures everything stays on schedule and within budget.

But is it the right fit for your project? This guide breaks down how a Construction Management Contract works, when to use it, and how it compares to other contract types. If you want a broader look at contract options, check out this resource on Construction Contracts.

What is a Construction Management Contract?

A Construction Management Contract is a legally binding agreement where a Construction Manager oversees the project on the owner's behalf. Instead of hiring a single general contractor to handle everything, the owner works with a CM who manages planning, budgeting, scheduling, and subcontractors.

This contract gives owners more control and cost transparency while benefiting from the CM’s expertise. It’s commonly used for large commercial, infrastructure, and government projects where flexibility, risk management, and direct contractor engagement are important.

Key Parties in a Construction Management Contract

A Construction Management Contract keeps the owner involved while relying on a Construction Manager for expert oversight. Each party has a distinct role in ensuring the project's success.

• Owner: The owner makes key decisions, holds direct contracts with subcontractors, and controls costs. They rely on the CM for project management.
• Construction Manager: The CM oversees scheduling, budgeting, and contractor coordination. They don’t perform the work but ensure everything stays on track.
• Contractors & Subcontractors: These specialists handle the construction work. They contract directly with the owner but follow the CM’s direction.
• Design Team: Architects and engineers ensure the project meets design and technical requirements, working closely with the CM to prevent issues.

Key Clauses in a Construction Management Contract

A Construction Management Contract must clearly define responsibilities, payment terms, and risk allocation to prevent disputes and keep the project on track. Well-drafted clauses ensure transparency and protect all parties involved.

Scope of Work

This clause outlines what the CM is responsible for, such as managing trade contractors, overseeing schedules, controlling costs, and ensuring quality standards are met. It should also clarify what the CM is not responsible for, preventing confusion over duties.

Fee Structure

The contract must define how the CM is paid. Payment can be a fixed fee, a percentage of project costs, or an hourly rate. Some agreements include incentives for meeting budget or schedule targets. Clearly stating these terms prevents disputes over compensation.

Risk Allocation

A CMC does not transfer construction risks to the CM. This clause should make it clear that the owner, not the CM, holds contracts with trade contractors and assumes financial risk for their performance. The CM is responsible for managing the process but not for construction defects or delays caused by contractors.

Termination Terms

Not all projects go as planned. This clause defines how and when either party can terminate the contract, what notice is required, and any financial obligations if the contract ends early. A clear termination clause protects both the owner and the CM.

Dispute Resolution

Disagreements can happen in any construction project. Instead of costly litigation, this clause should establish a process for resolving disputes through mediation or arbitration. A well-defined resolution process helps settle issues quickly and fairly.

Insurance and Liability

Construction projects involve risks like accidents, delays, and structural defects. This clause should specify who is responsible for carrying insurance and covering liabilities. Owners typically require the CM to have professional liability insurance, while subcontractors may need their own coverage.

Construction Management Contract Template: AS 4916

AS 4916 is the Australian Standard Construction Management General Conditions of Contract. It provides a structured way to manage construction projects where an owner engages a Construction Manager instead of a general contractor.

How AS 4916 Works

• The owner directly contracts with trade contractors, while the CM manages the project but does not perform construction work.
• The CM is responsible for coordination, scheduling, budgeting, and quality control but does not take on construction risks like a general contractor would.
• The owner retains full financial transparency and can choose contractors based on cost and expertise, rather than relying on a single contractor.

Key Features of AS 4916

• Clear Role Separation: The CM acts as a manager, while trade contractors handle the actual construction.
• Lower Risk for the CM: Unlike a , the CM does not guarantee completion dates, assume liability for defects, or provide security.
• Dispute Resolution Mechanism: AS 4916 prioritizes mediation or arbitration over litigation, reducing legal costs and delays.
• Flexibility for Owners: Owners can make contractor changes or scope adjustments without going through a general contractor.

What Risks Are Assumed by the Construction Manager?

Under AS 4916, a Construction Manager takes on far fewer risks than a contractor in a lump sum contract. The CM manages trade contractors but does not take responsibility for their work, delays, or defects. Here’s how AS 4916 limits the CM’s risk exposure:

• No responsibility for project completion deadlines – The CM is not liable if the project is delayed. They can claim extensions of time and delay costs instead of facing penalties.
• No liquidated damages for delays – Unlike a contractor in a lump sum contract, the CM does not face financial penalties for late completion.
• No liability for subcontractor defects – The CM is not responsible for defective work unless they directly caused the issue.
• No security or financial guarantees – The CM does not provide security or guarantees for the project, unlike lump sum contractors.
• No general site risk or injury liability – The CM is not liable for site accidents or property damage unless stated in the contract.
• Fiduciary duty when acting as an agent – If the CM represents the owner, they must act transparently and in the owner’s best interests, avoiding conflicts of interest.

Pros and Cons of Using a Construction Management Contract

A Construction Management Contract provides more flexibility and transparency than traditional contracts, but it also comes with challenges. Understanding the advantages and potential drawbacks helps owners decide if this contract type suits their project.

Advantages:

• Greater control – The owner selects contractors and stays involved in decision-making rather than relying on a single general contractor.
• Cost transparency – Direct contracts with trade contractors allow better tracking of expenses and reduce hidden markups.
• Flexibility – Owners can make changes more easily without going through a general contractor.
• Early contractor involvement – The CM helps identify risks and inefficiencies before construction starts, reducing costly mistakes.
• Unbiased advice – Since the CM is not responsible for construction work, they focus on managing the project efficiently rather than maximizing profits.

Challenges:

• Higher administrative burden – Owners must manage multiple contracts and ensure coordination between trade contractors.
• Requires strong management skills – Without clear oversight, communication breakdowns can lead to delays and cost overruns.
• Additional CM fees – Hiring a CM adds a cost that is not present in lump sum contracts, where the contractor includes management in their price.
• Potential cost increases – If changes are not well-managed, expenses can rise despite the added cost control measures.

When to Use a Construction Management Contract

A Construction Management Contract is best suited for projects where cost transparency, flexibility, and owner involvement are priorities. It allows the owner to stay in control while benefiting from the expertise of a Construction Manager. However, it is not the right choice for every project.

Best Situations for a CMC

• Large or complex projects – Ideal for commercial developments, infrastructure, and government projects that require multiple specialized contractors.
• Projects needing cost transparency – Owners get full visibility into contractor pricing, material costs, and budget management.
• Fast-track construction – Works well when design and construction phases overlap, as the CM helps coordinate early work while designs are finalized.
• Projects with changing scopes – Allows flexibility to adjust plans, hire different contractors, or modify budgets as needed.
• Owners with construction experience – Best for owners who understand project management or have a team in place to handle contractor coordination.

When a CMC May Not Be the Best Choice

• Small or straightforward projects – A lump sum contract may be more efficient when fewer contractors and decisions are involved.
• Owners who prefer a hands-off approach – Those who do not want to manage multiple contracts or make frequent decisions may find a general contractor more suitable.
• Fixed budget projects – If strict cost certainty is required from the start, a lump sum or design-build contract might be a better fit.

A CMC is ideal for owners who want flexibility and control but requires active management to ensure project success.

📌 Pro Tip: Managing multiple contracts and tracking costs doesn’t have to be overwhelming. Use Mastt’s Contract Register Template to organize agreements, monitor expenses, and streamline approvals, ensuring better financial control and contract compliance.

Construction Management Contract vs. Other Contract Types

Different contract types suit different projects. A construction management contract (CMC) provides more control and flexibility than traditional contracts like lump sum, cost-plus, and design-build. The main differences come down to who manages the project, who takes the risks, and how costs are handled.

Construction Management Contract vs. Lump Sum Contract

A lump sum contract sets a fixed price for the entire project. The contractor is responsible for delivering the project within that budget, taking on most of the financial risk. This works well for straightforward projects with a clear scope but leaves little flexibility. Any changes can lead to expensive contract variations. In contrast, a CMC gives the owner full cost transparency and the ability to adjust the scope as needed.

Construction Management Contract vs. Cost-Plus Contract

A cost-plus contract reimburses the contractor for all actual project costs plus a management fee. This gives the owner full visibility into spending, similar to a CMC. However, the owner bears more financial risk since there is no set budget cap. A CMC offers similar cost control benefits but allows the owner to contract directly with trade contractors, ensuring more competitive pricing.

Construction Management Contract vs. Design-Build Contract

A design-build contract combines design and construction under one contractor. This simplifies communication and speeds up the project, but it reduces owner involvement. The contractor makes most decisions, which can lead to less transparency over costs and design choices. A CMC keeps the owner actively involved, allowing them to select contractors and oversee project decisions while benefiting from expert management.

Final Notes on Construction Management Contract

A Construction Management Contract gives owners greater control, cost transparency, and flexibility, making it well-suited for complex projects that require active oversight. By working directly with a Construction Manager, owners can manage costs more effectively and adapt to project changes without relying on a single contractor.

However, this approach requires strong management capabilities and increases administrative responsibility. Weighing the benefits and challenges carefully will help determine if a CMC aligns with your project’s needs and objectives.