TYPES OF CONTRACTS

Contract DefinitionsA. From a Legal Point of View :A mutual agreement between two or

more parties that something shall be done, an agreement enforceable at law.

B. According to FIDIC :Contract means the General Conditions,

the Supplementary Conditions, the Specifications, the Drawings, the Bill of quantities, the Tender, the Letter of Acceptance, the Contract Agreement.

C. According to Method of Payment :The agreement of how the owner will pay

the contractor for work performed such as a lump-sum or cost-plus

payment.

Why Use contract in construction?

Describe scope of workEstablish time frameEstablish cost and payment provisionSet fourth obligations and relationshipMinimize disputesImprove economic return of investment

Major Contract Types (traditional)

TYPES OF CONSTRUCTION CONTRACTS

Two broad categories: Price Given in Advance Contracts (Priced-based

Contracts) Cost Reimbursement Contracts (Cost-based Contracts)

Factors Influencing the Choice of the Type of Contract The appropriateness for providing an adequate

incentive for efficient performance by the contractor The ability to introduce changes The allocation of risks The start and completion date of the project

Lump sum contracts Involves a total fixed priced for all

construction related activities. Can include incentives or benefits for

early termination, or can also have penalties, called liquidated damages, for a late termination.

 Preferred when a clear scope and a defined schedule has been reviewed and agreed upon.

Lump Sum Contract( Advantages)

Low risk on the owner, Higher risk to the contractor

Cost known at outsetContractor will assign best personnelContractor selection is easy.

Lump Sum Contract(Disadvantages)

Changes is difficult and costly.Contractor is free to use the lowest cost of

material equipment, methods.The contractor carries much of the risks. The

tendered price may include high risk contingency.

Competent contractors may decide not to bid to avoid a high-risk lump sum contract.

Unit Price

No total final price Quote Rates / Prices by units Re-negotiate for rates if the quantity or work

considerably exceeds the initial target Payment to contractor is based on the

measure. Unbalanced bids Higher risk to owner Ideal for work where quantities can not be

accurately established before construction starts.

Unit Price contract

• Require sufficient design definition to estimate quantities of units

• Contractors bid based on units of works• Time & cost risk (shared)

• Owner : at risk for total quantities• Contractor : at risk for fixed unit

price.

• Large quantities changes (>15-25%) can lead to increase or decrease of unit price.

Unit Price ( Advantages)Easy for contract selection.Early start is possible. Saves the heavy cost of preparing

many bills of quantities by the contractors. Fair basis for competition. In comparing with lump-sum contract,

changes in contract documents can be made easily by the owner.

Lower risk for contractor.

Unit Price (Disadvantages)

Final cost not known from the beginning (BOQ only is estimated)

Staff needed to measure the finished quantities and report on the units not completed.

Unit price sometime tend to draw unbalanced bid. (For Unit-Price Contracts, a balanced bid is one in which each bid is priced to carry its share of the cost of the work and also its share of the contractor’s profit.

Contractors raise prices on certain items and make corresponding reductions of the prices on other items ,without changing the total

amount of the bid)

Schedule of rates contract A Schedule of the work items without

quantities is prepared by the owner and /or A/E to be rated by the contractor.

The descriptions of items and the units of measurement are similar to those used in a normal B.O.Q., but no quantities are given.

It is common for separate rates to be quoted for labor, plant, and materials.

Used for repair and maintenance works or under conditions of urgency.

Schedule of Rates Contract Advantages:

1. Work can be commenced earlier than if a full B.O.Q has been prepared.

Disadvantage :

1. No indication of the final price of the works. 2. Very difficult to determine which contractor

submitted the most advantageous offer. 3. May cause financial problems to the public owners

Cost Plus1. Actual cost plus a negotiated reimbursement

to cover overheads and profit.2. Different methods of reimbursement :

Cost + percentageCost + fixed feeCost + fixed fee + profit-sharing clause.

3. Higher risk to owner4. Compromise : guaranteed maximum price

(GMP) reduces risk to owner while maintain advantage of cost plus contract.

5. By using this type of contract the contractor can start work without a clearly defined project scope, since all costs will be reimbursed and a profit guaranteed.

Cost + Percent of Cost1. The contractor is reimbursed for all his

costs with a fixed % age of costs to cover his services.

2. Project/site overheads may be covered

by the %age or computed as one of the costs.

Cost + Percent of CostFee = percentage of the total project cost(Cost = $500.000,Fee = 2%)

Advantages Disadvantages

profitable for the contractor

No incentive to finish jobquickly

Owner does not know totalprice

Larger the cost of the job, thehigher the fee the owner pays

Cost + Percent (Advantages)1. Construction can start before design is

completed. 2. If the contractor is efficient in the

utilization of resources then the cost to the client should represent a fair price for the work undertaken.

Cost + Percent (Disadvantages )1. The project total cost is completely

unknown before the project start. 2. No incentive for the contractor to be

efficient in his use of labors, materials or equipments.

3. Minimum efficiency maximizes the profit.

Cost Plus Fixed FeeMost common form of negotiated contractsCOST = expenses incurred by the contractor

for the construction of the facilityIncludes: Labor, equipment, materials, and

administrative costs FEE = compensation for expertise

Includes: profit

Cost + Fixed Fee

Fee = percentage of the original estimated total figureUtilized on large

multi-year jobs Ex: WW treatment

plant Facility (Cost = $20 million, Fee = 1%)

$20 Million 1% fee = $200,000 Million

Advantages Disadvantages

Fee amount is fixed regardlessof price fluctuation

Expensive materials andconstruction techniques maybe used to expediteconstruction

Provides incentive to completethe project quickly

Cost + Fixed Fee +Profit-Sharing Clause

Rewards contractors who minimize cost

Percentage of cost under GMP is considered profit

and shared with the contractorGuaranteed Maximum

Price (GMP)% of profit sharing is

specified in contract

Advantages

Disadvantages

Provides incentive to thecontractor to save money

Contractor must absorb anyamount over the GMP

Plans & specs. need to detailed

Cost + Fixed Fee +Profit-Sharing Clause

In this type of contract the contractor is reimbursed at cost with an agreed-upon fee up to the GMP, which is essentially a cap; beyond this point the contractor is responsible for covering any additional costs within the original project scope

An incentive clause, which specifies that the contractor will receive additional profit for bringing the project in under the GMP.

Guaranteed Maximum Price contract In a guaranteed maximum price (GMP)

contract, the contractor estimates the cost just like in a lump sum bid, but profit is limited to a specified amount.

In the event that actual costs are lower than the estimates, the owner keeps the savings.

In the event costs are higher, the contractor pays the difference and profit is reduced.

Advantages Greater price certainty for clients as the contractor normally

includes a sum for future design development and for risks. GMP promotes pre-agreement of changes as its philosophy

links neatly with a contractual

requirement to pre-agree the cost and time implications of any potential changes.

GMP provides greater control over spending as the contractor is bound to a maximum price.

This alerts the team to any potentially expensive items of design development.

GMP aligns the contractor with client and consultants encouraging team work with mutual

trust and common goals. Less administration is required as changes are limited; there is

quick settlement of the final

account.

Disadvantages

The client might pay too much as the contractor takes on greater risk and thus includes in the price an allowance for design development and risk. Often a competitive price is sacrificed in lieu of appointing a contractor early.

Contractor’s with design and build experience may have useful knowledge.

There is no standard form of contract for GMP so there is a greater possibility of errors and

misunderstandings of liabilities between the parties that may result in conflict.

Scope changes tend to cost more, it is accepted that scope changes to design and build are

more likely to be more expensive than with a traditional contract, the same can also be said

for GMP contracts.