TYPES OF CONTRACTS

Contract Definitions

A.

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 work
Establish time frame
Establish cost and payment provision
Set fourth obligations and relationship
Minimize disputes
Improve 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 atotal fixed pricedfor all

construction related activities.

Can include incentives orbenefits for
early termination, or can also have
penalties, called liquidated damages, for
a late termination.
Preferred when a clear scope and a
defined schedulehas been reviewed and
agreed upon.

Lump Sum Contract( Advantages)

Low risk on the owner, Higher risk to the

contractor
Cost known at outset
Contractor will assign best personnel
Contractor 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 contractors 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 Plus
Actual cost plus a negotiated reimbursement
to cover overheads and profit.
2. Different methods of reimbursement :
1.

Cost

+ percentage
Cost + fixed fee
Cost + fixed fee + profit-sharing clause.

Higher risk to owner

4. Compromise : guaranteed maximum price
(GMP) reduces risk to owner while maintain
advantage of cost plus contract.
3.

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 Cost

1. 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 Cost

Fee = percentage of

Advantages

Disadvantages

the total project cost

(Cost =

profitable for
the contractor

No incentive
to finish job
quickly

$500.000,Fee =
2%)

Owner does
not know total
price
Larger the
cost of the
job, the
higher 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 Fee

Most common form of negotiated contracts
COST = expenses incurred by the contractor

for the construction of the facility

Includes: Labor, equipment, materials, and

administrative costs

FEE = compensation for expertise

Includes: profit

Cost + Fixed Fee

Fee = percentage of

the original estimated

total figure
Utilized 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 regardless
of price
fluctuation

Expensive
materials and
construction
techniques may
be used to
expedite
construction

Provides
incentive to
complete
the 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
contractor
Guaranteed Maximum

Price (GMP)
% of profit sharing is
specified in contract

Advantag
es

Disadvantages

Provides
incentive
to the
contracto
r to save
money

Contractor
must absorb
any
amount 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.
Contractors 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.