Lecture 5:

Contract Types
AE-307
Construction Planning & Management
Engr. Syed Shahid Ali Bukhari
Head of the Department ( HOD )
Building & Architectural Engineering
University College of Engineering & Technology
Bahauddin Zakariya University, Multan.
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Contract Types
Four basic types of construction contracts:
1.Lump-Sum
2.Unit-Price
3.Cost-Plus,
4.Innovations and Trends, ( A + B ) Contracts

Contract Types Contd

There are many types of Contraction

Contracts, and the owner generally make
the selection of Contract Type. The Type of
contract selected depends on
The kind of work being performed and
The condition under which it is being
performed.
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Contract Types (Contd)

These types differ in two fundamental ways:

How the contractor's price is quoted to the
owner;
How risk is allocated to each of the parties

1.

Lump Sum Contracts

In a lump-sum contract, the contractor agrees to perform a

stipulated (require by contract) job of work in exchange for a fixed
sum of money.
The satisfactory completion of the work for the stated amount
remains the obligation (an agreement enforceable by law) of the
contractor;
Table illustrates the various scenarios.

Lump Sum Contracts (Contd)

Lump Sum Contract is popular with owners as the total cost of the project is
known in advance.
Submitting a single lump-sum bid is fair to the contractor.
The quantities of the materials can be calculated with a sufficient accuracy
during the bidding process to allow contractor to submit a single lump-sum
price for work.
For this reason, lump-sum contracts are widely used for residential and
building construction.
If the work is of such a type that its nature and quantity cannot be accurately
determined in advance of field operations, the lump-sum type of contract is not
suitable.

Lump Sum Contracts (Contd)

APPLICATION
Structure such as buildings that permit the bidders to
compute the quantities and cost accurately.

2. Unit Price Contract

Unit-price contracts are used for work where it is not possible to

calculate the exact quantity of materials that will be required.

Unit-price contracts are commonly used for heavy / highway work.

However, the total sum of money paid to the contractor for each
work item remains an indeterminable factor until completion of the
project, because payment is made to the contractor based on units
of work actually done and measured in the field.
Therefore, the owner does not know the exact ultimate cost of the
construction until completion of the project.

Unit Price Contract (Contd)

Contractors submit a price for each item on a unit price contract.

Unit prices are multiplied by the engineers estimated quantities and
totaled. The low bidder is the bidder with the low total of all items.
Items whose actual quantity varies from the estimated quantity by
more than 15 or 20%, either above or below the estimated quantity,
are sometimes subject to renegotiation of the unit price. When the
actual quantity is low, the contractor may request a renegotiated
higher price because the anticipated amount of earned overhead
has been reduced. When the actual quantity is high, the owner may
request a renegotiated unit price for the opposite reason.

The goal of unit-price contracts is fairness to both parties.

Unit Price Contract (Contd)

APPLICATION
Projects such as roads that do not permit accurate
calculation of materials quantities.

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Unit Price Contract (Contd)

Work Item

Estimated
Quantities*

Contract Unit Bid Amount Actual

Prices (Rs.)
Quantities
(Rs.)

Final Cost

Trench
Excavation

14000 CY

60

840000

13500

810000

9// Pipe

1750 LF

300

525000

1750 LF

525000

Compacted fill

4500 CY

450

2025000

4700

2115000

Backfill

9500 CY

50

475000

9800 CY

490000

Total

3865000

(Rs.)

3940000

*Provided by the owner

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3.

Cost-Plus

Cost-plus contracts are used in a situation that make it difficult or

impossible for either the owner or the contractor to predict their
costs during the negotiation, bid, and award process.
Factors that may make the calculation of costs impossible include
unpredictable and extreme weather conditions such as would be
encountered in the Antarctic, unknown transportation requirements
to remote locations, combat or war, or
contracts where the amount of effort that will be required depends
on another contractors

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3.

Cost-Plus contd
Cost plus contracts take many forms, the most common being

COST PLUS FEE

Most Owners prefer cost plus fixed fee because then the
amount of profit the contactor will earn cannot increase,
because thereby removing any incentive for the contractor
to be anything less than thrifty, or to produce poor-quality
work.
COST-PLUS A PERCENTAGE
Cost-plus-percent contracts may be fair in situations that are very
difficult , or when time to complete the work is not known with any
certainity but some incentives to maintain productivity are needed.
A profit that can be earned in six months may not be attractive if
there is possibility that the work may require a year or two.
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3.

Cost-Plus contd

APPLICATION
Any type of facility that has conditions making it
impossible for either the owner or the contractor to
compute costs accurately; an example would be work
in remote areas.

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Cost-Plus-Fee Contracts (Contd)

Table illustrates this scenario for a Rs.8,000,000/budget.

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3.

Cost-Plus contd

Contractor will be reimbursed for actual project cost plus an additional

amount for profit and overhead
This type of contract is used when total construction cost to the owner
can not be known until completion of project.
For the contractor, this type contract guarantees a profit ;
For the owner, a significant risk under this arrangement ;
Cost-Plus-Fee contract shifts risk from contractor to owner;
It is essential that the contract clearly define what is considered
reimbursable as a cost and what is included in overhead and profit
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3.

Innovations and Trends,

( A + B ) Contracts

A + B Contracts are relatively new innovation imported from Europe.

They were developed by the Department of Transportation to reduce
the time high-ways are under construction, and therefore are
restricting traffic flow.
Many highway project involve renovation, repair, improvement, or
widening. Very few are true new construction projects.
The purpose of the A + B contract is to provide a way to compensate
the contractor for the expertise in sequencing and staging to
complete the work quickly and efficiently.

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3.

Innovations and Trends,

( A + B ) Contracts

A + B means cost plus-time. The Department of Transportation

will asign a value to each day the highway work is being performed
and the contractor will then bid a price plus a number of days.
The lower bidder is determined as low total of the value of cost plus
time.
It is, of course, very possible to select a low bidder who bids a
higher price, but fewer days than the other contractors.

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3.

Innovations and Trends,

( A + B ) Contracts

Contract that provide a financial incentive to the

contractors with the expertise to complete the project
quickly, by reward early completion.

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THANK YOU !
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3.
Innovations and Trends, ( A + B ) Contracts
Guaranteed Maximum Price
Contract
(GMP)
In cost-plus-type of contract , an accurate cost of the project is not
known until after completion of the construction.
A solution to this problem has been to provide for a guaranteed
maximum price (GMP) to the owner.
In GMP Contract, the contractor guarantees that the project will be
constructed in full accordance with the drawings and specs and the
cost to the owner will not exceed some total upset price (lowest
price).
In return for its services, the contractor receives a prescribed fee.

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Guaranteed Maximum Price Contract (GMP) (Contd)

If the cost of the work exceeds the assured maximum, the

contractor pays for the excess.
The determination of the upset cost (lowest cost) by the contractor
must be based on careful estimates made from complete drawings
and specifications.
An incentive for the contractor to keep costs below the guaranteed
maximum is sometimes provided by a bonus clause stating that the
contractor and the owner will share any savings.
The owner may offer splits in the 60/40 range or even 50/50 range.

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Guaranteed Maximum Price Contract (GMP) (Contd)

Contracts providing for a fixed fee with a guaranteed maximum

price are sometimes competitively bid in a manner similar to that
used for lump-sum contracts.
Table

GMP Contract

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Note:

The project delivery systems and

commercial contract types can
cross match

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